11
LIABILITIES
SUMMARY CHAPTER OF QUESTIONS BY OBJECTIVES AND BLOOM'S TAXONOMY
Item 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 143. 144. 145. 146. 147. SO 1 1 1 1 2 2 2 2 2 2 1 1 1 1 1 1 1 2 2 2 2 2 2 2 2 2 2 2 3 1 2 2 3 3 BT C K C C K K C AP C K C K K K C C C K AP AN AP C AN AP C C K K K AP AP AN AP AP Item 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83. 84. 85. 86. 87. 88. 148. 149. 150. 151. 152. SO 2 2 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 4 4 4 4 4 4 4 4 4 5 5 BT Item SO BT Item SO 4 4 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 6 7 8 9 BT C C K C C C C C AP C C AP C AP AP C C C AP K C C C C C K C AP C AN AN AP AP AN Item 41. 42. 43. 44. 45. 46. 47. 48. 49. *50. 127. 128. 129. 130. 131. 132. 133. 134. 135. 136. 137. *138. *139. *140. *141. *142. SO 5 6 6 6 6 6 7 8 8 9 5 6 6 6 6 6 6 6 7 7 8 9 9 9 9 9 BT K K C K K K K K K K K AP C C C AP AP AP C C K C AP K C C True-False Statements C 21. 3 K 31. K 22. 4 K 32. K 23. 4 K 33. C 24. 4 K 34. AP 25. 4 K 35. C 26. 4 K 36. K 27. 4 C 37. AP 28. 4 C 38. K 29. 4 K 39. K 30. 4 K 40. Multiple Choice Questions AP K K K K AP AP AP AP C C AP C C AP K K C K AN AN AN AN AN 89. 4 K 90. 4 K 91. 4 K 92. 4 K 93. 4 K 94. 4 K 95. 4 K 96. 4 K 97. 4 K 98. 4 K 99. 4 C 100. 4 K 101. 4 K 102. 4 K 103. 4 K 104. 4 C 105. 4 C 106. 4 K 107. 5 AP Exercises 153. 154. 155. 156. 157. 5 5 5 5 5 AN AN AN AN AN 108. 109. 110. 111. 112. 113. 114. 115. 116. 117. 118. 119. 120. 121. 122. 123. 124. 125. 126. 158. 159. 160. 161. *162.
*163.
9
AN
11 - 2
Test Bank for Financial Accounting, Fifth Edition
SUMMARY OF QUESTIONS BY OBJECTIVES AND BLOOM'S TAXONOMY (cont.) Item 164. 165. 166. 167. 186. 187. SO 1 1 1 2 1 2 BT K K K K K AP Item 168. 169. 170. 171. 188. 189. SO 2 3 4 4 3 5 BT Item SO BT Item SO 5 5 5 5 5 5 BT AP K K K AP AP Item *180. SO 9 BT K
Completion Statements K 172. 4 K 176. K 173. 4 K 177. K 174. 5 K 178. K 175. 5 K 179. Brief Exercises AP AP 190. 191. 5 5 AP AP 192. 193.
194. 195.
6 8
AP AP
SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE
Item 1. 2. 3. 5. 6. 7. 8. 13. 14. 15. 16. 22. 23. 24. 25. 26. 27. 33. 34. 35. 36. 37. 38. Type TF TF TF TF TF TF TF TF TF TF TF TF TF TF TF TF TF TF TF TF TF TF TF TF Item 4. 51. 52. 9. 10. 11. 12. 17. 18. 19. 20. 28. 29. 30. 31. 32. 83. 40. 41. 107. 108. 109. 110. 111. Type TF MC MC TF TF TF TF TF TF TF TF TF TF TF TF TF MC TF TF MC MC MC MC MC Item 53. 54. 55. 58. 59. 60. 61. 21. 69. 70. 71. 84. 85. 86. 87. 88. 89. 112. 113. 114. 115. 116. 117. 118. Type Item Type Item Type C C C MC MC MC Ex MC MC MC MC MC MC MC MC MC MC MC MC Ex Ex Ex Ex Ex Item 186. Type BE Item Type Study Objective 1 MC 56. MC 164. MC 57. MC 165. MC 143. Ex 166. Study Objective 2 MC 62. MC 66. MC 63. MC 67. MC 64. MC 68. MC 65. MC 144. Study Objective 3 TF 72. MC 76. MC 73. MC 77. MC 74. MC 78. MC 75. MC 79. Study Objective 4 MC MC MC MC MC MC MC MC MC MC MC MC MC 90. MC 96. 91. MC 97. 92. MC 98. 93. MC 99. 94. MC 100. 95. MC 101. Study Objective 5 119. 120. 121. 122. 123. 124. 125. MC MC MC MC MC MC MC 126. 127. 151. 152. 153. 154. 155.
145. 167. 168. 187. 80. 81. 82. 146. 102. 103. 104. 105. 106. 148. 156. 157. 158. 174. 175. 176. 177.
Ex C C BE MC MC MC Ex MC MC MC MC MC Ex Ex Ex Ex C C C C 147. 169. 188. Ex C BE
149. 150. 170. 171. 172. 173. 178. 179. 189. 190. 191. 192. 193.
Ex Ex C C C C C C BE BE BE BE BE
Liabilities
11 - 3
Study Objective 6 42. 43. 47. 48. TF TF TF TF 44. 45. TF TF 46. 128. TF MC 129. 130. MC MC 131. 132. MC MC 133. 134. MC MC 159. 194. Ex BE
135. MC 49. TF
Study Objective 7 136. MC 160. Ex Study Objective 8 137. MC 161. Ex 195. Study Objective *9 *141. MC *142. MC *162. *163. Ex Ex *180. BE C
*50. MC *138. MC * Appendix
*139. MC *140. MC
Note: TF = True-False MC = Multiple Choice
C = Completion Ex = Exercise
BE = Brief Exercise
The chapter also contains one set of ten Matching questions and four Short-Answer Essay questions.
11 - 4
Test Bank for Financial Accounting, Fifth Edition
CHAPTER STUDY OBJECTIVES
1. Explain a current liability and identify the major types of current liabilities. A current liability is a debt that can reasonably be expected to be paid (1) from existing current assets or through the creation of other current liabilities, and (2) within one year or the operating cycle, whichever is longer. The major types of current liabilities are notes payable, accounts payable, sales taxes payable, unearned revenues, and accrued liabilities such as taxes, salaries and wages, and interest payable. 2. Describe the accounting for notes payable. When a promissory note is interest-bearing, the amount of assets received upon the issuance of the note is generally equal to the face value of the note. Interest expense is accrued over the life of the note. At maturity, the amount paid is equal to the face value of the note plus accrued interest. 3. Explain the accounting for other current liabilities. Sales taxes payable are recorded at the time the related sales occur. The company serves as a collection agent for the taxing authority. Sales taxes are not an expense to the company. Until employee withholding taxes are remitted to governmental taxing authorities, they are credited to appropriate liability accounts. Unearned revenues are initially recorded in an unearned revenue account. As the revenue is earned, a transfer from unearned revenue to earned revenue occurs. The current maturities of long-term debt should be reported as a current liability in the balance sheet. 4. Explain why bonds are issued and identify the types of bonds. Bonds may be sold to many investors, and they offer the following advantages over common stock: (a) stockholder control is not affected, (b) tax savings result, (c) earnings per share of common stock may be higher. The following different types of bonds may be issued: secured or unsecured bonds, term and serial bonds, registered and bearer bonds, convertible, and callable bonds. 5. Prepare the entries for the issuance of bonds and interest expense. When bonds are issued, Cash is debited for the cash proceeds and Bonds Payable is credited for the face value of the bonds. In addition, Bond Interest Payable is credited if there is accrued interest, and the accounts Premium on Bonds Payable and Discount on Bonds Payable are used to show the bond premium or bond discount. Bond discount and bond premium are amortized by the straight-line method. 6. Describe the entries when bonds are redeemed or converted. When bonds are redeemed at maturity, Cash is credited and Bonds Payable is debited for the face value of the bonds. When bonds are redeemed before maturity, it is necessary to (a) eliminate the carrying value of the bonds at the redemption date, (b) record the cash paid, and (c) recognize the gain or loss on redemption. When bonds are converted to common stock, the carrying (or book) value of the bonds is transferred to appropriate paid-in capital accounts, and no gain or loss is recognized. 7. Describe the accounting for long-term notes payable. Each payment consists of (1) interest on the unpaid balance of the loan, and (2) a reduction of loan principal. The interest decreases each period, while the portion applied to the loan principal increases each period. 8. Identify the methods for the financial statement presentation and analysis of long-term liabilities. The nature and amount of each long-term debt should be reported in the balance sheet or in the notes accompanying the financial statements. The long-run solvency of a company may be analyzed by computing the debt to total assets ratio and the times interest earned ratio. *9. Contrast the effects of the straight-line and effective-interest methods of amortizing bond discount and bond premium. The straight-line method of amortization results in a constant amount of amortization and interest expense per period but a varying percentage rate. In contrast, the effectiveinterest method results in varying amounts of amortization and interest expense per period but a constant percentage rate of interest. The effective-interest method generally results in a better matching of expenses with revenues. When the difference between the straight-line and effectiveinterest method is material, the use of the effective-interest method is required under GAAP.
Liabilities
11 - 5
TRUE-FALSE STATEMENTS
1. 2. All liabilities must be paid out of current earnings. Current liabilities are expected to be paid within one year or the operating cycle, whichever is longer. The relationship between current liabilities and current assets is important in evaluating a company's ability to pay off its long-term debt. A company should try to keep its current ratio as high as possible. Notes payable usually require the borrower to pay interest. Notes payable are often used instead of accounts payable. Accounts payable are usually interest-bearing. A $15,000, 8%, 9-month note payable requires an interest payment of $900 at maturity. Most notes are not interest bearing. With an interest-bearing note, the amount of cash received upon issuance of the note generally exceeds the note's face value. Interest expense on a note payable is only recorded at maturity. Interest expense is reported under Other Expenses and Losses in the income statement. Notes Payable may be classified as a current or long-term liability, depending on the maturity date. The higher the sales tax rate, the more profit a retailer can earn. If a retailer sells goods for a total price of $300, which includes a 5% sales tax, the amount of the sales tax is $14.29. During the month, a company sells goods for a total of $105,000, which includes sales taxes of $5,000; therefore, the company should recognize $100,000 in Sales Revenues and $5,000 in Sales Tax Expense. Payroll taxes include the employer's share of social security taxes and state and federal unemployment taxes. Unearned revenues are received before goods are delivered or services are rendered. Metropolitan Symphony sells 200 season tickets for $40,000 that includes a five concert season. The amount of Unearned Ticket Revenue after the third concert is $24,000. Current maturities of long-term debt refers to the amount of interest on a note payable that must be paid in the current year.
3.
4. 5. 6. 7. 8. 9. 10.
11. 12. 13.
14. 15.
16.
17.
18. 19.
20.
11 - 6 21.
Test Bank for Financial Accounting, Fifth Edition The relationship of current assets and current liabilities is expressed as a ratio called the working capital ratio. Each bondholder may vote for the board of directors in proportion to the number of bonds held. Bond interest paid by a corporation is an expense whereas dividends paid are not an expense of the corporation. Registered bonds are bonds that are delivered to owners by U.S. registered mail service. A debenture bond is an unsecured bond that is issued against the general credit of the borrower. Bonds are a form of interest bearing notes payable. Neither corporate bond interest nor dividends are deductible for tax purposes. A 10% stock dividend is the equivalent of a $1,000 par value bond paying annual interest of 10%. A $1,000 bond with a contractual interest rate of 6% that is issued to yield 6.5% will result in a cash payment to the bond holder of $65. If a company issues bonds with a face amount of $100,000 at 99, the company will record Discount on Bonds Payable of $1,000. The contractual interest rate is always equal to the market rate of interest on the date that bonds are issued. If $150,000 face value bonds are issued at 104, the proceeds received will be $104,000. If bonds are sold between interest dates, the issuer requires the investor to pay the market price for the bonds plus accrued interest since the last interest date. The amortization of Discount on Bonds Payable increases interest expense. A corporation that issues bonds at a discount will recognize interest expense at a rate which is greater than the market rate of interest. If bonds are issued at a discount, the issuing corporation will pay a principal amount less than the face amount of the bonds on the maturity date. If the market rate of interest on a bond is 4% and the contractual rate of interest on the bond is 5%, bonds will sell at a discount. If the market rate of interest on a bond is 4% and the contractual rate of interest on the bond is 3.5%, bonds will sell at a discount. If $240,000, 8%, bonds are issued on January 1, and pay interest semiannually, the amount of interest paid on July 1, will be $9,600.
22.
23.
24. 25.
26. 27. 28.
29.
30.
31.
32. 33.
34. 35.
36.
37.
38.
39.
Liabilities 40.
11 - 7
If bonds sell at a premium, the interest expense recognized each year will be greater than the contractual rate of interest. The carrying value of bonds is calculated by adding the balance of the Discount on Bonds Payable account to the balance in the Bonds Payable account. Material gains or losses on bond redemption are reported as an extraordinary item on the income statement. If $100,000 par value bonds with a carrying value of $95,200 are redeemed at 97, a loss on redemption will be recorded. Bonds Payable is reported on the Balance Sheet at the face value of the bond. Generally, convertible bonds do not pay interest. Convertible bonds are often referred to as callable bonds. A long-term note that pledges title to specific property as security for a loan is known as a mortgage payable. The debt to total assets ratio measures the percentage of the total assets provided by creditors. The times interest earned ratio is computed by dividing net income by interest expense. The effective interest method of amortization results in varying amounts of amortization and interest expense per period but a constant rate of interest.
41.
42.
43.
44. 45. 46. 47.
48.
49. *50.
Answers to True-False Statements
Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
1. 2. 3. 4. 5. 6. 7. 8.
F T F T T T F T
9. 10. 11. 12. 13. 14. 15. 16.
F F F T T F T F
17. 18. 19. 20. 21. 22. 23. 24.
T T F F F F T F
25. 26. 27. 28. 29. 30. 31. 32.
T T F F F T F F
33. 34. 35. 36. 37. 38. 39. 40.
T T F F F T T F
41. 42. 43. 44. 45. 46. 47. 48.
F T T F F F T T
49. 50.
F T
11 - 8
Test Bank for Financial Accounting, Fifth Edition
MULTIPLE CHOICE QUESTIONS
51. The relationship between current liabilities and current assets is a. useful in determining income. b. useful in evaluating a company's liquidity. c. called the matching principle. d. useful in determining the amount of a company's long-term debt. Most companies pay current liabilities a. out of current assets. b. by issuing interest-bearing notes payable. c. by issuing stock. d. by creating long-term liabilities. A current liability is a debt that can reasonably expected to be paid a. within one year. b. between 6 months and 18 months. c. out of currently recognized revenues. d. out of cash currently on hand. Liabilities are classified on the balance sheet as current or a. deferred. b. unearned. c. long-term. d. accrued. From a liquidity standpoint, it is most desirable for a company to have current a. assets equal current liabilities. b. liabilities exceed current assets. c. assets exceed current liabilities. d. liabilities exceed long-term liabilities. The relationship of current assets to current liabilities is used in evaluating a company's a. operating cycle. b. revenue-producing ability. c. short-term debt paying ability. d. long-range solvency. Which of the following is usually not an accrued liability? a. Interest payable b. Wages payable c. Taxes payable d. Notes payable With an interest-bearing note, the amount of assets received upon issuance of the note is generally a. equal to the note's face value. b. greater than the note's face value. c. less than the note's face value. d. equal to the note's maturity value.
52.
53.
54.
55.
56.
57.
58.
Liabilities
Use the following information for questions 59 61.
11 - 9
Chase County Bank agrees to lend Agler Brick Company $300,000 on January 1. Agler Brick Company signs a $300,000, 8%, 9-month note. 59. The entry made by Agler Brick Company on January 1 to record the proceeds and issuance of the note is a. Interest Expense ........................................................................ 18,000 Cash. ......................................................................................... 282,000 Notes Payable .................................................................. 300,000 b. Cash ......................................................................................... 300,000 Notes Payable .................................................................. 300,000 c. Cash ......................................................................................... 300,000 Interest Expense ........................................................................ 18,000 Notes Payable .................................................................. 318,000 d. Cash ......................................................................................... 300,000 Interest Expense ........................................................................ 18,000 Notes Payable .................................................................. 300,000 Interest Payable ............................................................... 18,000 What is the adjusting entry required if Agler Brick Company prepares financial statements on June 30? a. Interest Expense ........................................................................ 12,000 Interest Payable ............................................................... 12,000 b. Interest Expense ........................................................................ 12,000 Cash ................................................................................ 12,000 c. Interest Payable ......................................................................... 12,000 Cash ................................................................................ 12,000 d. Interest Payable ......................................................................... 12,000 Interest Expense .............................................................. 12,000 What entry will Agler Brick Company make to pay off the note and interest at maturity assuming that interest has been accrued to September 30? a. Notes Payable ........................................................................... 318,000 Cash ................................................................................ 318,000 b. Notes Payable ........................................................................... 300,000 Interest Payable ......................................................................... 18,000 Cash ................................................................................ 318,000 c. Interest Expense ........................................................................ 18,000 Notes Payable ........................................................................... 300,000 Cash ................................................................................ 318,000 d. Interest Payable ......................................................................... 12,000 Notes Payable ........................................................................... 300,000 Interest Expense ........................................................................ 6,000 Cash ................................................................................ 318,000 The interest expense on a $1,000, 4%, 3-month note is a. $10 b. $40 c. $100 d. $120
60.
61.
62.
11 - 10 Test Bank for Financial Accounting, Fifth Edition
Use the following information for questions 63 64. On October 1, Steve's Carpet Service borrows $50,000 from National Bank on a 3-month, $50,000, 8% note. 63. What entry must Steve's Carpet Service make on December 31 before prepared? a. Interest Payable ......................................................................... Interest Expense ............................................................... b. Interest Expense ........................................................................ Interest Payable ................................................................ c. Interest Expense ........................................................................ Interest Payable ................................................................ d. Interest Expense ........................................................................ Notes Payable .................................................................. financial statements are 1,000 1,000 4,000 4,000 1,000 1,000 1,000 1,000
64.
The entry by Steve's Carpet Service to record payment of the note and accrued interest on January 1 is a. Notes Payable ............................................................................ 51,000 Cash ................................................................................. 51,000 b. Notes Payable ............................................................................ 50,000 Interest Payable .......................................................................... 1,000 Cash ................................................................................. 51,000 c. Notes Payable ............................................................................ 50,000 Interest Payable ......................................................................... 4,000 Cash ................................................................................. 54,000 d. Notes Payable ............................................................................ 50,000 Interest Expense ........................................................................ 1,000 Cash ................................................................................. 51,000 Interest expense on an interest-bearing note is a. always equal to zero. b. accrued over the life of the note. c. only recorded at the time the note is issued. d. only recorded at maturity when the note is paid. Appleton Company borrowed $10,000 on a 3-month, 12% note from SunTrust Bank on January 1. Appleton accured interest expense at the end of each month. The entry to record the payment of the note on April 1 is a. Notes Payable 10,000 Interest Payable 300 Cash 10,300 b. Notes Payable 10,000 Interest Expense 300 Cash 9,700 c. Notes Payable 10,000 Cash 10,000 d. Notes Payable 11,200 Cash 10,000 Interest Payable 1,200
65.
66.
Liabilities
67. Sales taxes collected by a retailer are recorded by a. crediting Sales Taxes Revenue. b. debiting Sales Taxes Expense. c. crediting Sales Taxes Payable. d. debiting Sales Taxes Payable. Unearned Rental Revenue a. is a contra account to Rental Revenue. b. is a revenue account. c. is reported as a current liability. d. is debited when rent is received in advance. The amount of sales tax collected by a retail store when making sales is a. a miscellaneous revenue for the store. b. a current liability. c. not recorded because it is a tax paid by the customer. d. recorded as an operating expense.
11 - 11
68.
69.
70.
A retail store credited the Sales account for the sales price and the amount of sales tax on sales. If the sales tax rate is 5% and the balance in the Sales account amounted to $168,000, what is the amount of the sales taxes owed to the taxing agency? a. $160,000. b. $168,000. c. $8,400. d. $8,000. On December 31, 2005, Bertram Company had an outstanding note payable totaling $125,000. The note is due in equal annual installments of $25,000 on January 1 of each of the next 5 years. The current portion of long-term debt that should be reported on the December 31, 2005 balance sheet is a. $0 b. $25,000 c. $50,000 d. $125,000 Sales taxes collected by a retailer are expenses a. of the retailer. b. of the customers. c. of the government. d. that are not recognized by the retailer until they are submitted to the government. A retailer that collects sales taxes is acting as an agent for the a. wholesaler. b. customer. c. taxing authority. d. chamber of commerce. Sales taxes collected by a retailer are reported as a. contingent liabilities. b. revenues. c. expenses. d. current liabilities.
71.
72.
73.
74.
11 - 12 Test Bank for Financial Accounting, Fifth Edition
75. A cash register tape shows cash sales of $3,000 and sales taxes of $150. The journal entry to record this information is a. Cash .......................................................................................... 3,000 Sales ................................................................................ 3,000 b. Cash .......................................................................................... 3,150 Sales Tax Revenue ........................................................... 150 Sales ................................................................................ 3,000 c. Cash .......................................................................................... 3,000 Sales Tax Expense .................................................................... 150 Sales ................................................................................ 3,150 d. Cash .......................................................................................... 3,150 Sales ................................................................................ 3,000 Sales Taxes Payable ........................................................ 150 Ron's Pharmacy has collected $600 in sales taxes during March. If sales taxes must be remitted to the state government monthly, what entry will Ron's Pharmacy make to show the March remittance? a. Sales Tax Expense .................................................................... 600 Cash ................................................................................. 600 b. Sales Taxes Payable .................................................................. 600 Cash ................................................................................. 600 c. Sales Tax Expense .................................................................... 600 Sales Taxes Payable ........................................................ 600 d. No entry required. Marsh Company does not ring up sales taxes separately on the cash register. Total receipts for February amounted to $14,310. If the sales tax rate is 6%, what amount must be remitted to the state for February's sales taxes? a. $858.60. b. $810.00. c. $807.08. d. cannot be determined. Mary's Boutique has total receipts for the month of $16,170 including sales taxes. If the sales tax rate is 5%, what are Mary's sales for the month? a. $15,362. b. $15,400. c. $16,170. d. cannot be determined. Two sisters operate a bed and breakfast on the coast of Maine. As customers make reservations they are required to pay cash in advance equal to one-half of the rate for their stay. What entry will be made if a customer remits a deposit of $250? a. Cash 500 Sales 250 Unearned Revenue 250 b. Sales 500 Earned Revenue 250 Unearned Revenue 250 c. Unearned Revenue 250 Earned Revenue 250 d. Cash 250 Unearned Revenue 250
76.
77.
78.
79.
Liabilities
80.
11 - 13
Julie Watts has a large consulting practice. New clients are required to pay one-half of the consulting fees up front. The balance is paid at the conclusion of the consultation. How does Watts account for the cash received at the end of the engagement? a. Cash Unearned Consulting Revenue b. Cash Unearned Consulting Revenue Consulting Revenue c. Prepaid Consulting Revenue Consulting Revenue d. No entry is required when the engagement is concluded. Santo Company typically sells subscriptions on an annual basis, and publishes six times a year. The magazine sells 30,000 subscriptions in January at $15 each. What entry is made in January to record the sale of the subscriptions? a. Subscriptions Receivable ........................................................... 450,000 Subscription Revenue ...................................................... 450,000 b. Cash ......................................................................................... 450,000 Unearned Subscription Revenue ...................................... 450,000 c. Subscriptions Receivable ........................................................... 75,000 Unearned Subscription Revenue ...................................... 75,000 d. Prepaid Subscriptions ................................................................ 450,000 Cash ................................................................................ 450,000 Baldwin Company issued a five-year interest-bearing note payable for $50,000 on January 1, 2003. Each January the company is required to pay $10,000 on the note. How will this note be reported on the December 31, 2004 balance sheet? a. Long-term debt, $50,000. b. Long-term debt, $40,000. c. Long-term debt, $30,000; Long-term debt due within one year, $10,000. d. Long-term debt of $40,000; Long-term debt due within one year, $10,000. From the standpoint of the issuing company, a disadvantage of using bonds as a means of longterm financing is that a. bond interest is deductible for tax purposes. b. interest must be paid on a periodic basis regardless of earnings. c. income to stockholders may increase as a result of trading on the equity. d. the bondholders do not have voting rights. If a corporation issued $2,000,000 in bonds which pay 10% annual interest, what is the annual net cash cost of this borrowing if the income tax rate is 30%? a. $2,000,000. b. $60,000. c. $200,000. d. $140,000. 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. 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.
81.
82.
83.
84.
85.
86.
11 - 14 Test Bank for Financial Accounting, Fifth Edition
d. a term bond. 87. Stockholders 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. Which of the following is not an advantage of issuing bonds instead of common stock? a. Stockholder control is not affected. b. Earnings per share on common stock may be lower. c. Income to common shareholders may increase. d. Tax savings result. Bonds that are secured by real estate are termed a. mortgage bonds. b. serial bonds. c. debentures. d. bearer bonds. Bonds that mature at a single specified future date are called a. coupon bonds. b. term bonds. c. serial bonds. d. debentures. Bonds that may be exchanged for common stock at the option of the bondholders are called a. options. b. stock bonds. c. convertible bonds. d. callable bonds. 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. Investors who receive checks in their names for interest earned on bonds must hold a. registered bonds. b. coupon bonds. c. bearer bonds. d. direct bonds. A bondholder that sends in a coupon to receive interest payments must have a(n) a. unsecured bond. b. bearer bond. c. mortgage bond. d. serial bond. Bonds that may be directly transferred to another party by delivery are a. coupon bonds. b. debentures. c. registered bonds. d. transportable bonds.
88.
89.
90.
91.
92.
93.
94.
95.
Liabilities
96.
11 - 15
Bonds that must be canceled and reissued as new bonds in order to have ownership interest transferred are a. coupon bonds. b. bearer bonds. c. serial bonds. d. registered bonds. Corporations are granted the power to issue bonds through a. tax laws. b. state laws. c. federal security laws. d. bond debentures. The party who has the right to exercise a call option on bonds is the a. investment banker. b. bondholder. c. bearer. d. issuer. Bonds cannot always be categorized as a. callable or convertible. b. term or serial. c. registered or bearer. d. secured or unsecured. 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. Bonds with a face amount of $1,000,000 and a contractual interest rate of 8% are sold to yield 7.5%. The annual interest expense recorded for the bonds will be a. $5,000 b. $40,000 c. $75,000 d. $80,000. The contractual rate of interest is usually stated as a. a monthly rate. b. a daily rate. c. a semiannual rate. d. an annual rate. Bonds with a face amount of $1,000,000 and a contractual interest rate of 7% are sold to yield 7.5%. The annual cash payment to bond holders will be a. $35,000 b. $70,000. c. $75,000. d. $700,000.
97.
98.
99.
100.
101.
102.
103.
11 - 16 Test Bank for Financial Accounting, Fifth Edition
Use the following exhibit for questions 104 105. Bonds Wal-Mart 9 1/8 104. Current Yield 9.2 Volume 45 Close Net Change 99 +5/8
18
The contractual interest rate of the Wal-Mart bonds is a. greater than the market rate of interest. b. less than the market rate of interest. c. equal to the market rate of interest. d. not determinable. On the day of trading referred to above, a. no Wal-Mart bonds were traded. b. bonds with market prices of $4,500 were traded. c. at closing, the selling price of the bond was higher than the previous day's price. d. the bond sold for $ 99. The present value of a bond is also known as its a. face value. b. market price. c. future value. d. deferred value. A $1,000 face value bond with a quoted price of 96 is selling for a. $1,000. b. $960. c. $906. d. $96. If the market rate of interest is 7% and the contractual rate of interest is 6.5%, bonds will sell a. at a premium. b. at face value. c. at a discount. d. only after the contracutal rate of interest is increased. On April 1, 2003, Timi Corporation issued $4,000,000, 10-year, 8% bonds, dated January 1, 2003 at 100 plus accrued interest. Interest is payable semiannually on January 1 and July 1. The journal entry to record this transaction on April 1, 2003 is a. Cash .......................................................................................... 4,000,000 Bonds Payable .................................................................. 4,000,000 b. Cash .......................................................................................... 4,080,000 Bonds Payable .................................................................. 4,080,000 c. Interest Expense ........................................................................ 80,000 Cash .......................................................................................... 4,000,000 Bonds Payable .................................................................. 4,080,000 d. Cash .......................................................................................... 4,080,000 Bonds Payable .................................................................. 4,000,000 Bond Interest Payable ....................................................... 80,000 The interest expense recorded on an interest payment date is increased a. by the amortization of premium on bonds payable. b. by the amortization of discount on bonds payable. c. only if the bonds were sold at face value. d. only if the market rate of interest is less than the stated rate of interest on that date.
105.
106.
107.
108.
109.
110.
Liabilities
111.
11 - 17
On January 1, 2003, $1,000,000, 5-year, 10% bonds, were issued for $970,000. Interest is paid semiannually on January 1 and July 1. If the issuing corporation uses the straight-line method to amortize discount on bonds payable, the monthly amortization amount is a. $5,808. b. $6,000. c. $484. d. $500. A corporation issues $300,000, 10%, 5-year bonds on January 1, 2003 for $287,400. Interest is paid semiannually on January 1 and July 1. If the corporation uses the straight-line method of amortization of bond discount, the amount of bond interest expense to be recognized on July 1, 2003 is a. $31,260. b. $15,000. c. $16,260. d. $13,740. If the market rate of interest is 10%, a $10,000, 12%, 10-year bond that pays interest semiannually would sell at an amount a. less than face value. b. equal to the face value. c. greater than face value. d. that cannot be determined. The present value of a $10,000, 5-year bond, will be less than $10,000 if the a. contractual rate of interest is less than the market rate of interest. b. contractual rate of interest is greater than the market rate of interest. c. bond is convertible. d. contractual rate of interest is equal to the market rate of interest. Ergun Corporation issues $2 million, 10%, 10-year bonds at face value. Interest will be paid semiannually. When calculating the market price of the bond, the present value of a. $200,000 received for 10 periods must be calculated. b. $2 million received in 10 periods must be calculated. c. $2 million received in 20 periods must be calculated. d. $100,000 received for 10 periods must be calculated. Lopez Corporation issues 500, 10-year bonds, 8%, $1,000 bonds dated January 1, 2003, at 96. The journal entry to record the issuance will show a a. debit to Cash of $500,000. b. credit to Discount on Bonds Payable for $20,000. c. credit to Bonds Payable for $480,000. d. debit to Cash for $480,000. The market rate of interest is often called the a. stated rate. b. effective rate. c. coupon rate. d. contractual rate. 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 rate of interest.
112.
113.
114.
115.
116.
117.
118.
11 - 18 Test Bank for Financial Accounting, Fifth Edition
119. The statement that "Bond prices vary inversely with changes in the market rate of interest" means that if the a. market rate of interest increases, the contractual interest rate will decrease. b. contractual interest rate increases, then bond prices will go down. c. market rate of interest decreases, then bond prices will go up. d. contractual interest rate increases, the market rate of interest will decrease. 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. Over the term of the bonds, the balance in the Discount on Bonds Payable account will a. fluctuate up and down if the market is volatile. b. decrease. c. increase. d. be unaffected until the bonds mature. 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. Raptor Company's trial balance at December 31 reports Bonds Payable of $100,000 and Premium on Bonds Payable of $4,500. The bonds will be reported on the balance sheet at a carrying value of a. $4,500. b. $95,500. c. $100,000. d. $104,500. Dublin Company issued 8%, 5-year bonds with a face amount of $1,000,000 at 97. The annual straight-line amortization of discount on bonds payable will a. decrease interest expense by $600. b. decrease the carrying value of the bond by $6,000 each year. c. increase interest expense by $6,000. d. not impact interest expense or the carrying value of the bond. Two thousand bonds with a face value of $1,000 each, are sold at 102. The entry to record the issuance is a. Cash .......................................................................................... 2,040,000 Bonds Payable .................................................................. 2,040,000 b. Cash .......................................................................................... 2,000,000 Premium on Bonds Payable ....................................................... 40,000 Bonds Payable .................................................................. c. Cash .......................................................................................... 2,040,000 Premium on Bonds Payable .............................................. Bonds Payable .................................................................. d. Cash .......................................................................................... 2,040,000 Discount on Bonds Payable .............................................. Bonds Payable ..................................................................
120.
121.
122.
123.
124.
125.
2,040,000 40,000 2,000,000 40,000 2,000,000
Liabilities
126.
11 - 19
Craddock Company issued 6%, 10-year bonds with a face amount of $1,000,000 at 102. The annual straight-line amortization of premium on bonds payable will a. decrease interest expense by $2,000. b. increase the carrying value of the bond by $2,000 each year. c. increase interest expense by $20,000. d. not impact interest expense or the carrying value of the bond. If bonds are sold between interest dates, a. the trustee of the bonds must pay the correct interest due to bondholders based on the interim purchase date. b. accrued interest is part of the total bond proceeds. c. accrued interest increases the total amount of interest expense to be paid at the next interest payment date. d. the issuer of the bonds will skip the next interest payment date. If twenty $1,000 convertible bonds with a carrying value of $25,000 are converted into 3,000 shares of $5 par value common stock, the journal entry to record the conversion is a. Bonds Payable .......................................................................... 25,000 Common Stock ................................................................. 25,000 b. Bonds Payable .......................................................................... Premium on Bonds Payable ....................................................... Common Stock ................................................................. c. Bonds Payable .......................................................................... Premium on Bonds Payable ....................................................... Common Stock ................................................................. Paid-in Capital in Excess of Par ........................................ 20,000 5,000 25,000 20,000 5,000 15,000 10,000 25,000 5,000 15,000 5,000
127.
128.
d. Bonds Payable .......................................................................... Discount on Bonds Payable .............................................. Common Stock ................................................................. Paid-in Capital in Excess of Par ........................................ 129. If there is a loss on bonds redeemed early, it is a. debited directly to Retained Earnings. b. reported as "Other Expense" on the income statement. c. reported as an "Extraordinary Item" on the income statement. d. debited to Interest Expense, as a cost of financing.
130.
If bonds can be converted into common stock, a. they will sell at a lower price than comparable bonds without a conversion feature. b. they will carry a higher rate of interest than comparable bonds without the conversion feature. c. they will be converted only if the issuer calls them in for conversion. d. the bondholder may benefit if the market price of the common stock increases substantially. When bonds are converted into common stock, a. the market price of the stock on the date of conversion is credited to the Common Stock account. b. the market price of the bonds on the date of conversion is credited to the Common Stock account. c. the market price of the stock and the bonds is ignored when recording the conversion. d. gains or losses on the conversion are recognized.
131.
11 - 20 Test Bank for Financial Accounting, Fifth Edition
132. If bonds with a face value of $40,000 are converted into common stock when the carrying value of the bonds is $36,000, the entry to record the conversion will include a debit to a. Bonds Payable for $40,000. b. Bonds Payable for $36,000. c. Discount on Bonds Payable for $4,000. d. Bonds Payable equal to the market price of the bonds on the date of conversion. A $300,000 bond was retired at 98 when the carrying value of the bond was $296,000. The entry to record the retirement would include a a. gain on bond redemption of $4,000. b. loss on bond redemption of $2,000. c. loss on bond redemption of $4,000. d. gain on bond redemption of $2,000. Ten $1,000 bonds with a carrying value of $12,800 are converted into 1,000 shares of $5 par value common stock. The common stock had a market value of $9 per share on the date of conversion. The entry to record the conversion is a. Bonds Payable ........................................................................... 12,800 Common Stock ................................................................. Paid-in 5,000 Capital in Excess of Par ......................................... 7,800 b. Bonds Payable ........................................................................... Premium on Bonds Payable ....................................................... Common Stock ................................................................. Paid-in Capital in Excess of Par ........................................ c. Bonds Payable ........................................................................... Premium on Bonds Payable ....................................................... Common Stock ................................................................. Paid-in Capital in Excess of Par ......................................... 10,000 2,800 9,000 3,800 10,000 2,800 5,000 7,800 12,800 9,000 3,800
133.
134.
d. Bonds Payable ........................................................................... Common Stock ................................................................. Paid-in Capital in Excess of Par ......................................... 135.
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 to Interest Expense a. Increases b. Increases c. Decreases d. Decreases Portion Allocated to Payment of Principal Increases Decreases Decreases Increases
136.
The entry to record an installment payment on a long-term note payable is a. Mortgage Notes Payable Cash b. Interest Expense Cash c. Mortgage Notes Payable Interest Expense Cash d. Bonds Payable Cash
Liabilities
137.
11 - 21
The discount on bonds payable or premium on bonds payable is shown on the balance sheet as an adjustment to bonds payable to arrive at the carrying value of the bonds. Indicate the appropriate addition or subtraction to bonds payable: Premium on Bonds Payable a. Add b. Deduct c. Add d. Deduct Discount on Bonds Payable Add Add Deduct Deduct
*138.
Either the straight-line method or the effective-interest method of amortization will always result in a. the same amount of interest expense being recognized over the term of the bonds. b. the same amount of interest expense being recognized each year. c. more interest expense being recognized than if premium or discounts were not amortized. d. the same carrying value each year during the term of the bonds. A corporation issued $600,000, 10%, 5-year bonds on January 1, 2003 for $648,666 which reflects an effective-interest rate of 8%. Interest is paid semiannually on January 1 and July 1. If the corporation uses the effective-interest method of amortization of bond premium, the amount of bond interest expense to be recognized on July 1, 2003, is a. $30,000. b. $24,000. c. $32,433. d. $25,947. A bond discount must a. always be amortized using straight-line amortization. b. always be amortized using the effective-interest method. c. be amortized using the effective-interest method if it yields annual amounts that are materially different than the straight-line method. d. be amortized using the straight-line method if it yields annual amounts that are materially different than the effective-interest method. When the effective-interest method of bond discount amortization is used a. the applicable interest rate used to compute interest expense is the prevailing market interest rate on the date of each interest payment date. b. the carrying value of the bonds will decrease each period. c. interest expense will not be a constant dollar amount over the life of the bond. d. the interest paid to bondholders will be a function of the effective-interest rate on the date the bonds are issued. When the effective-interest method of bond premium amortization is used, the a. amount of premium amortized will get larger with successive amortization. b. carrying value of the bonds will increase with successive amortization. c. interest paid to bondholders will increase after each interest payment date. d. interest rate used to calculate interest expense will be the contractual rate.
*139.
*140.
*141.
*142.
11 - 22 Test Bank for Financial Accounting, Fifth Edition Answers to Multiple Choice Questions
Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64.
b a a c c c d a b a b a c b
65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78.
b a c c b d b b c d d b b b
79. 80. 81. 82. 83. 84. 85. 86. 87. 88. 89. 90. 91. 92.
a b b c b d c a b b a b c a
93. 94. 95. 96. 97. 98. 99. 100. 101. 102. 103. 104. 105. 106.
a b a d b d a b c d b b c b
107. 108. 109. 110. 111. 112. 113. 114. 115. 116. 117. 118. 119. 120.
b c d b d c c a c d b b c c
121. 122. 123. 124. 125. 126. 127. 128. 129. 130. 131. 132. 133. 134.
b b d c c a b c c d c a d c
135. 136. 137. *138. *139. *140. *141. *142.
d c c a d c c a
EXERCISES
Ex. 143 Sample Company has the following selected accounts after posting adjusting entries: Accounts Payable $ 50,000 Notes Payable, 3-month 80,000 Accumulated Depreciation--Equipment 14,000 Notes Payable, 5-year, 8% 30,000 Payroll Tax Expense 6,000 Interest Payable 3,000 Mortgage Payable 200,000 Sales Tax Payable 16,000 Instructions (a) Prepare the current liability section of Sample Company's balance sheet, assuming $20,000 of the mortgage is payable next year. (b) Comment on Sample's liquidity, assuming total current assets are $320,000. Solution 143 (a) (10 min.)
SAMPLE COMPANY Current Liabilities Current portion of long-term debt Notes payable, 3-month Accounts payable Sales tax payable Interest payable Total Current Liabilities
$ 20,000 80,000 50,000 16,000 3,000 $169,000
(b)
The liquidity position looks favorable. If all current liabilities are paid out of current assets, there would still be $151,000 of current assets. The current assets are almost twice the current liabilities and it appears as though Sample Company has sufficient current resources to meet current obligations when due.
Liabilities Ex. 144
11 - 23
On November 1, Franklin Company borrows $120,000 from SouthTrust State Bank by signing a 3-month, 10%, interest-bearing note. Instructions Prepare the necessary entries below associated with the note payable on the books of Franklin Company. (a) Prepare the entry on November 1 when the note was issued. (b) Prepare any adjusting entries necessary on December 31 to prepare the year-end financial statements. Assume no other interest accrual entries have been made. (c) Prepare the entry to record payment of the note at maturity. Solution 144 (a) (10 min.) Cash ................................................................. Notes Payable ............................................... Interest Expense .............................................. Interest Payable ............................................. ($120,000 10% 2 12) 120,000 120,000 2,000 2,000
November 1
(b)
December 31
(c)
February 1 Notes Payable ........................................................... Interest Payable ........................................................ Interest Expense ........................................................ Cash .................................................................
120,000 2,000 1,000 123,000
Ex. 145 On April 30, Graber Company borrows $60,000 from the bank by signing a 6-month, 10%, interest-bearing note. Instructions Prepare the necessary entries below associated with the note payable on the books of Graber Company. (a) Prepare the entry on April 30 when the note was issued. (b) Prepare any adjusting entries necessary on June 30 in order to prepare the monthly financial statements. Assume no other interest accrual entries have been made. (c) Prepare the entry to record payment of the note at maturity. Solution 145 (a) (10 min.) 60,000 60,000 1,000 1,000 60,000 1,000 2,000 63,000
April 30 Cash ......................................................................... Notes Payable .................................................. June 30 Interest Expense ........................................................ Interest Payable ($60,000 10% 2/12) .......... October 31 Notes Payable ......................................................... Interest Payable ......................................................... Interest Expense ........................................................ Cash .................................................................
(b)
(c)
11 - 24 Test Bank for Financial Accounting, Fifth Edition Ex. 146 Finney Company billed its customers a total of $1,575,000 for the month of November. The total includes a 5% state sales tax. Instructions (a) Determine the proper amount of revenue to report for the month. (b) Prepare the general journal entry to record the revenue and related liabilities for the month.
Solution 146 (a) (b)
(5 min.)
$1,575,000 1.05 = $1,500,000 is the total sales revenue. $1,500,000 .05 = $75,000 is the state sales tax liability. Journal Entry: Accounts Receivable .................................................................. 1,575,000 Sales Revenue ................................................................... State Sales Tax Payable ....................................................
1,500,000 75,000
Ex. 147 Skipperette Publications publishes a sailing magazine for women. The magazine sells for $5.00 a copy on the newsstand. Yearly subscriptions to the magazine cost $24 per year (12 issues). During December 2005, Link Publications sells 4,000 copies of the magazine at newsstands and receives payment for 2,000 subscriptions for 2006. Financial statements are prepared monthly. Instructions (a) Prepare the December 2005 journal entries to record the newsstand sales and subscriptions received. (b) Prepare the necessary adjusting entry on January 31, 2006 after the January issue has been mailed to subscribers.
Solution 147 (a)
(5 min.) 20,000 20,000 48,000 48,000
Cash (or Accounts Receivable) ................................................... Newsstand Sales ............................................................... Cash ........................................................................................... Unearned Subscription Revenue ........................................
(b)
$48,000 12 months = $4,000 Unearned Subscription Revenue ................................................ Subscription Revenue ........................................................ 4,000 4,000
Liabilities Ex. 148
11 - 25
The board of directors of Grand Corporation is considering two plans for financing the purchase of new plant equipment. Plan #1 would require the issuance of $4,000,000, 9%, 20-year bonds at face value. Plan #2 would require the issuance of 400,000 shares of $5 par value common stock which is selling for $10 per share on the open market. Grand Corporation currently has 200,000 shares of common stock outstanding and the income tax rate is expected to be 30%. Assume that income before interest and income taxes is expected to be $600,000 if the new factory equipment is purchased. Instructions Prepare a schedule which shows the expected net income after taxes and the earnings per share on common stock under each of the plans that the board of directors is considering.
Solution 148
(14 18 min.) Plan #1 Issue Bonds $600,000 360,000 240,000 72,000 $168,000 200,000 $.84 Plan #2 Issue Stock $600,000 -- 600,000 180,000 $420,000 600,000 $.70
Income before interest taxes Interest expense ($4,000,000 9%) Income before taxes Income taxes (30%) Net income Outstanding shares Earnings per share
Ex. 149 Byson Company is considering two alternatives for the financing of some high technology medical equipment. These two alternatives are: 1. Issue 50,000 shares of $10 par value common stock at $50 per share. 2. Issue $2,500,000, 10%, 10-year bonds at par. It is estimated that the company will earn $1,500,000 before interest and taxes as a result of acquiring the medical equipment. The company has an estimated tax rate of 30% and has 200,000 shares of common stock outstanding prior to the new financing. Instructions Determine the effect on net income and earnings per share for these two methods of financing.
11 - 26 Test Bank for Financial Accounting, Fifth Edition Solution 149 (10 15 min.)
The alternative effects on net income and earnings per share are as follows: Issue Stock $1,500,000 -- 1,500,000 (450,000) $1,050,000 250,000 $4.20 Issue Bonds $1,500,000 (250,000) 1,250,000 (375,000) $ 875,000 200,000 $4.38
Income before interest and taxes Interest (10% $2,500,000) Income before income taxes Income tax expense Net income Outstanding shares Earnings per share
Net income is higher if the equipment is financed through the issuance of stock. However, earnings per share is lower because of the additional number of shares of common stock that are outstanding.
Ex. 150 Three plans for financing a $20,000,000 corporation are under consideration by its organizers. Under each of the following plans, the securities will be issued at their par or face amount and the income tax rate is estimated at 30%. Plan 1 -- -- $20,000,000 $20,000,000 Plan 2 -- $10,000,000 10,000,000 $20,000,000 Plan 3 $10,000,000 5,000,000 5,000,000 $20,000,000
12% Bonds 8% Preferred Stock, $100 par Common Stock, $10 par Total
It is estimated that income before interest and taxes will be $6,000,000. Instructions Determine for each plan, the expected net income and the earnings per share on common stock.
Solution 150
(14 19 min.) Plan 1 $6,000,000 -- 6,000,000 (1,800,000) 4,200,000 $4,200,000 2,000,000 $2.10 Plan 2 $6,000,000 -- 6,000,000 (1,800,000) 4,200,000 (800,000) $3,400,000 1,000,000 $3.40 Plan 3 $6,000,000 (1,200,000) 4,800,000 (1,440,000) 3,360,000 (400,000) $2,960,000 500,000 $5.92
Earnings before interest and income tax Deduct interest on bonds Income before income tax Deduct income tax Net Income Dividends on preferred stock Available for dividends on common stock Shares of common stock outstanding Earnings per share on common stock
Liabilities Ex. 151
11 - 27
On January 1, 2005, Larkspur Corporation issued $500,000, 10%, 5-year bonds, at 98. The bonds pay semiannual interest on January 1 and July 1. The company uses the straight-line method of amortization and has a calendar year end. Instructions Prepare all the journal entries that Larkspur Corporation would make related to this bond issue through January 1, 2006. Be sure to indicate the date on which the entries would be made.
Solution 151 January 1, 2005
(8 12 min.) 490,000 10,000 500,000
Cash ........................................................................................ Discount on Bonds Payable ....................................................... Bonds Payable .................................................................. (To record sale of bonds at a discount) July 1, 2005 Bond Interest Expense ............................................................... Discount on Bonds Payable ............................................... Cash .................................................................................. (To record semiannual payment of interest and amortization of discount) December 31, 2005 Bond Interest Expense ............................................................... Discount on Bonds Payable ............................................... Bond Interest Payable ....................................................... (To record accrued bond interest and amortization of bond discount) January 1, 2006 Bond Interest Payable ................................................................ Cash .................................................................................. (To record payment of bond interest liability)
26,000 1,000 25,000
26,000 1,000 25,000
25,000 25,000
Ex. 152 On May 1, 2005, Cerner Corporation issued $1,200,000, 9%, 5-year bonds, dated January 1, 2005, at face value plus accrued interest. The bonds pay interest semiannually on January 1 and July 1. The company uses the straight-line method of amortization and has a calendar year end. Instructions Prepare the journal entries that Cerner Corporation would make related to the bond issue on the dates indicated below: January 1, 2005 May 1, 2005 July 1, 2005
11 - 28 Test Bank for Financial Accounting, Fifth Edition Solution 152 (8 11 min.)
January 1, 2005 No entries are required on this date. May 1, 2005 Cash ......................................................................................... 1,236,000 Bonds Payable ................................................................... Bond Interest Payable ........................................................ (To record sale of bond issue at face value plus accrued interest) Accrued Interest = $1,200,000 9% 4/12 = $36,000 July 1, 2005 Bond Interest Expense ............................................................... Bond Interest Payable ................................................................ Cash .................................................................................. (To record payment of bond interest )
1,200,000 36,000
18,000 36,000 54,000
Ex. 153 On January 1, 2005, Topper Corporation issued $100,000, 12%, 10-year bonds at face value. Interest is payable semiannually on July 1 and January 1. Topper Corporation has a calendar year end. Instructions Prepare all entries related to the bond issue for 2005.
Solution 153 2005 Jan. 1
(6 10 min.) 100,000 100,000 6,000 6,000
Cash .................................................................................. Bonds Payable .......................................................... Bond Interest Expense ....................................................... Cash .......................................................................... ($100,000 12% 1/2 = $6,000) Bond Interest Expense ....................................................... Bond Interest Payable ...............................................
July
1
Dec. 31
6,000 6,000
Liabilities Ex. 154
11 - 29
On March 1, 2005, Moore Company issued $150,000, 9%, 10-year bonds at face value plus accrued interest. Interest is payable semiannually on July 1 and January 1. Moore Company has a calendar year end. Instructions Prepare all journal entries related to the bond issue for 2005.
Solution 154 2005 Mar. 1
(6 10 min.) 152,250 150,000 2,250
Cash .................................................................................. Bonds Payable .......................................................... Bond Interest Payable ............................................... ($150,000 9% 2/12 = $2,250) Bond Interest Expense ....................................................... Bond Interest Payable ....................................................... Cash ......................................................................... ($150,000 9% 1/2 = $2,250) Bond Interest Expense ....................................................... Bond Interest Payable ...............................................
July
1
4,500 2,250 6,750
Dec. 31
6,750 6,750
Ex. 155 Wishbone Company issued $2,000,000, 12%, 20-year bonds on January 1, 2005, at 101. Interest is payable semiannually on July 1 and January 1. Wishbone uses the straight-line method of amortization and has a calendar year end. Instructions Prepare all journal entries made in 2005 related to the bond issue. Solution 155 Jan. 1 (8 12 min.) 2,000,000 20,000
Cash .................................................................................. 2,020,000 Bonds Payable .......................................................... Premium on Bonds Payable ...................................... Bond Interest Expense ....................................................... Premium on Bonds Payable .............................................. Cash ......................................................................... ($2,000,000 12% 1/2 = $120,000) ($20,000 1/40 = $500) Bond Interest Expense ....................................................... Premium on Bonds Payable .............................................. Bond Interest Payable ............................................... 119,500 500
July
1
120,000
Dec. 31
119,500 500 120,000
11 - 30 Test Bank for Financial Accounting, Fifth Edition Ex. 156 Neutron Company issued $1,500,000, 10%, 20-year bonds on December 31, 2005, for $1,460,000. Interest is payable semiannually on June 30 and December 31. Neutron uses the straight-line method of amortization and has a calendar year end. Instructions Prepare the appropriate journal entries on (a) December 31, 2005. (b) June 30, 2006.
Solution 156 (a) Dec. 31
(8 12 min.) 2005 Cash .......................................................................... 1,460,000 Discount on Bonds Payable ...................................... 40,000 Bonds Payable ................................................. 2006 Bond Interest Expense ............................................... Discount on Bonds Payable .............................. Cash ................................................................. ($1,500,000 10% 1/2 = $75,000; $40,000 1/40 = $1,000)
1,500,000
(b) June 30
76,000 1,000 75,000
Ex. 157
(Decision Making)
William Arms Company issued $600,000 of 8 percent, 10-year bonds at 102. Interest is paid semiannually, and the straight-line method is used for amortization. Assume that the market rate for similar investments is 7 percent and the bonds are issued on an interest date. Instructions a. What amount was received for the bonds? b. How much interest is paid each interest period? c. What is the premium amortization for the first interest period? d. How much bond interest expense is recorded on the first interest date? e. What is the carrying value of the bonds after the first interest date?
Solution 157 a. b. c. d. e. $612,000 $24,000 $600 $23,400 $611,400
(10 12 min.) ($600,000 1.02) ($600,000 .08 6/12) ($612,000 $600,000) 20 ($24,000 $600) ($612,000 $600)
Liabilities Ex. 158 (Decision Making)
11 - 31
On January 1, 2005, Opti Company issued bonds with a face value of $500,000. The bonds carry a stated interest rate of 7 percent that is payable each July 1 and January 1. Instructions a. Prepare the journal entry for the issuance assuming the bonds are issued at 95. b. Prepare the journal entry for the issuance assuming the bonds are issued at 103.
Solution 158 a.
(5 7 min.) 475,000 25,000 500,000 515,000 500,000 15,000
Cash ($500,000 .95) ................................................................ Discount on Bonds Payable ....................................................... Bonds Payable ................................................................... Cash ($500,000 1.03) ............................................................... Bonds Payable .................................................................. Premium on Bonds Payable ..............................................
b.
Ex. 159 Presented below are three independent situations: (a) Heerey Corporation purchased $400,000 of its bonds on June 30, 2005 at 102 and immediately retired them. The carrying value of the bonds on the retirement date was $367,200. The bonds pay semiannual interest and the interest payment due on June 30, 2005 has been made and recorded. Elder, Inc., purchased $600,000 of its bonds at 96 on June 30, 2005 and immediately retired them. The carrying value of the bonds on the retirement date was $590,000. The bonds pay semiannual interest and the interest payment due on June 30, 2005 has been made and recorded. Sealy Company has $200,000, 10%, 12-year convertible bonds outstanding. These bonds were sold at face value and pay semiannual interest on June 30 and December 31 of each year. The bonds are convertible into 80 shares of Sealy $5 par value common stock for each $1,000 par value bond. On December 31, 2005 after the bond interest has been paid, $50,000 par value of bonds were converted. The market value of Sealy's common stock was $48 per share on December 31, 2005
(b)
(c)
Instructions For each of the independent situations, prepare the journal entry to record the retirement or conversion of the bonds.
11 - 32 Test Bank for Financial Accounting, Fifth Edition Solution 159 (a) June 30 (13 16 min.) Bonds Payable ............................................................ Loss on Bond Redemption .......................................... Discount on Bonds Payable .............................. Cash ................................................................. ($400,000 $367,200 = $32,800) ($400,000 102% = $408,000) Bonds Payable ............................................................ Discount on Bonds Payable .............................. Gain on Bond Redemption ................................ Cash ................................................................. ($600,000 $590,000 = $10,000) ($600,000 96% = $576,000) Bonds Payable ............................................................ Common Stock ................................................. Paid-in Capital in Excess of Par ........................ ($5 80 50 = $20,000) 400,000 40,800 32,800 408,000
(b) June 30
600,000 10,000 14,000 576,000
(c) Dec. 31
50,000 20,000 30,000
Ex. 160 Dwyer Corporation issues a $500,000, 12%, 20-year mortgage note payable on December 31, 2005 to obtain needed financing for the construction of a building addition. The terms provide for semiannual installment payments of $33,231 on June 30 and December 31. Instructions (a) Prepare the journal entries to record the mortgage loan on December 31, 2005 and the first installment payment. (b) Will the amount of principal reduction in the second installment payment be more or less than with the first installment payment?
Solution 160 (a) Dec. 31 June 30
(5 8 min.) Cash .......................................................................... Mortgage Notes Payable .................................. Interest Expense ....................................................... Mortgage Notes Payable ........................................... Cash ................................................................. ($500,000 12% 1/2 = $30,000) 500,000 500,000 30,000 3,231 33,231
(b)
The amount of principal reduction will increase with each installment payment.
Liabilities Ex. 161
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The adjusted trial balance for Perkins Corporation at the end of the current year contained the following accounts: Bonds payable, 10% .......................................................... Bond interest payable ........................................................ Discount on bonds payable ............................................... Mortgage notes payable, 9%, due 2005 ............................ Accounts payable .............................................................. $500,000 20,000 40,000 60,000 120,000
Instructions (a) Prepare the long-term liabilities section of the balance sheet. (b) Indicate the proper balance sheet classification for the accounts listed above that do not belong in the long-term liabilities section. Solution 161 (a) (4 7 min.) $500,000 40,000
Long-term liabilities Bonds payable 10% Less: Unamortized bond discount Mortgage notes payable Total long-term liabilities
$460,000 60,000 $520,000
(b)
Bond interest payable and accounts payable should be classified as current liabilities.
*Ex. 162 On January 1, 2005 Stine Corporation issued $600,000, 9%, 5-year bonds for $576,834. The bonds were sold to yield an effective-interest rate of 10%. Interest is paid semiannually on June 30 and December 31. The company uses the effective-interest method of amortization. Instructions (a) Prepare a bond discount amortization schedule which shows the amortization of discount for the first two interest payment dates. (Round to the nearest dollar.) (b) Prepare the journal entries that Stine Corporation would make on January 1, June 30, and December 31, 2005 related to the bond issue.
*Solution 162 (a)
(15 22 min.) STINE CORPORATION Bond Discount Amortization Effective-Interest Method--Semiannual Interest Payments 9% Bonds Issued at 10% Interest to be Paid Issue date) 27,000 27,000 Interest Expense $28,844 28,934 Discount Amortization 1,844 1,934 Unamortized Discount $23,166 21,322 19,390 Carrying Value of Bonds $576,834 578,678 580,610
Interest Periods 1/01/05 6/30/05 12/31/05
11 - 34 Test Bank for Financial Accounting, Fifth Edition *Solution 162 (b) (cont.) 576,834 23,166 600,000
January 1, 2005 Cash ........................................................................................... Discount on Bonds Payable ........................................................ Bonds Payable ................................................................... (To record issuance of bonds at a discount) June 30, 2005 Bond Interest Expense ............................................................... Discount on Bonds Payable ............................................... Cash .................................................................................. (To record payment on interest and amortization of discount) December 31, 2005 Bond Interest Expense ............................................................... Discount on Bonds Payable ............................................... Cash .................................................................................. (To record payment of interest and amortization of discount)
28,844 1,844 27,000
28,934 1,934 27,000
*Ex. 163 On June 30, 2005 Wyatt, Inc., sold $600,000 (face value) of bonds. The bonds are dated June 30, 2003, pay interest semiannually on December 31 and June 30, and will mature on June 30, 2007 The following schedule was prepared by the accountant for 2003. Semi-Annual Interest Period 1 Interest to be Paid $24,000 Interest Expense $28,500 Unamortized Amount $30,000 25,500 Bond Carrying Value $570,000 574,500
Amortization $4,500
Instructions On the basis of the above information, answer the following questions. (Round your answer to the nearest dollar or percent.) 1. What is the stated rate of interest for this bond issue? 2. What is the market rate of interest for this bond issue? 3. What was the selling price of the bonds as a percentage of the face value? 4. Prepare the journal entry to record the sale of the bond issue on June 30, 2005 5. Prepare the journal entry to record the payment of interest and amortization on December 31, 2005
Liabilities *Solution 163 (12 17 min.)
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1. $24,000 $600,000 = .04 2 = 8% 2. $28,500 $570,000 = .05 2 = 10% 3. $570,000 $600,000 = .95 The bonds sold at 95. 4. June 30, 2005 Cash ............................................................................................. Discount on Bonds Payable .......................................................... Bonds Payable ..................................................................... December 31, 2005 Interest Expense ........................................................................... Discount on Bonds Payable .................................................. Cash .....................................................................................
570,000 30,000 600,000
5.
28,500 4,500 24,000
11 - 36 Test Bank for Financial Accounting, Fifth Edition
COMPLETION STATEMENTS
164. A current liability is a debt that can be expected to be paid within ____________ year(s) or the ______________, whichever is longer. 165. Liabilities are classified on the balance sheet as being _______________ liabilities or ______________ liabilities. 166. The relationship between current liabilities and ______________ is useful in evaluating a company's liquidity. 167. Obligations in written form are called ______________ and usually require the borrower to pay interest. 168. With an interest-bearing note, a borrower must pay the ________________ of the note plus _________________ at maturity. 169. Sales taxes collected from customers are a ______________ of the business until they are remitted to the taxing agency. 170. Bonds that mature at a single specified future date are called _______________ bonds, whereas bonds that mature in installments are called ________________ bonds. 171. The cash payment made to bond holders is calculated ______________ by the ___________________. by multiplying the
172. The contractual interest rate on a bond is also known as the ________________ rate. 173. The market price of a bond is obtained by discounting to their present value the ________________ paid at maturity, and all ________________ payments to be made over the term of the bond. 174. When bonds are issued between interest dates, the investor must pay the market price for the bonds plus ________________ since the last interest date. 175. If bonds are issued at face value (par), it indicates that the ________________ rate of interest must be equal to the ________________ rate of interest. 176. The amortization of _______________________ increases interest expense. 177. If bonds were issued at a premium, then the contractual rate of interest was _______________ than the market rate of interest. 178. The carrying value of a bond issued at a discount is determined by __________________ Discounts on Bonds Payable from the face amount of Bonds Payable. 179. A method of amortizing bond discount or premium that allocates an equal amount each period is the ________________ method. *180. When there is a ________________ difference between the straight-line and effective interest methods of amortization, the ________________ method is required under GAAP.
Liabilities Answers to Completion Statements 164. 165. 166. 167. 168. 169. 170. 171. 172. one, operating cycle current, long-term current assets notes payable face value, interest current liability term, serial face amount, coupon rate stated 173. 174. 175. 176. 177. 178. 179. 180.
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principal, interest accrued interest stated (contractual), market (effective) Discount on Bonds Payable greater subtracting straight-line material, effective interest
11 - 38 Test Bank for Financial Accounting, Fifth Edition
MATCHING
181. Match the items below by entering the appropriate code letter in the space provided. A. B. C. D. E. Serial bonds Debenture bonds Bond indenture Premium on bonds payable Discount on bonds payable F. G. H. I. J. Effective-interest method of amortization Straight-line method of amortization Bonds Callable bonds Registered bonds
_____ 1. Bonds subject to retirement at a stated dollar amount prior to maturity. _____ 2. A legal document that sets forth the terms of a bond issue. _____ 3. Bonds that mature in installments. _____ *4. Produces a periodic interest expense equal to a constant percentage of the carrying value of the bonds. _____ 5. Bonds issued in the name of the owner. _____ 6. A form of interest-bearing notes payable used by corporations. _____ 7. Occurs when the contractual rate of interest is greater than the market rate of interest. _____ 8. Unsecured bonds issued against the general credit of the borrower. _____ 9. Occurs when the contractual rate of interest is less than the market rate of interest. _____ 10. Produces a periodic interest expense that is the same amount each interest period.
Answers to Matching 1. 2. 3. *4. 5. I C A F J 6. 7. 8. 9. 10. H D B E G
Liabilities
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SHORT-ANSWER ESSAY QUESTIONS
S-A E 182 Bonds are frequently issued at amounts greater or less than face value. Describe how the market rate of interest, relative to the contractual rate of interest, affects the selling price of bonds. Also explain the rationale for requiring an investor to pay accrued interest when a bond is purchased between interest payment dates.
Solution 182 The market rate of interest often is different from the contractual rate of interest and therefore bonds are frequently issued at amounts greater or less than face value. When the market rate of interest is higher than the contractual rate, investors can find better investments elsewhere and consequently there is less demand for the bonds. So to make the bonds more attractive the issue price will be lowered and the bonds will be issued at a discount. Conversely, if the market rate of interest is less than the contractual rate there will be greater demand for the bonds because of the higher rate of interest. Thus, the issue price will be greater than face value and the bonds will be issued at a premium. The investor is required to pay accrued interest because it allows the bond issuer to make the same interest payment to all bondholders on the same interest payment date. Otherwise the bond issuer would have to determine the interest payment for each bondholder based on how long that particular bond had been outstanding. Thus, the bond issuer does not have to maintain detailed records and saves bookkeeping costs.
S-A E 183 Bonds may be retired either when they are purchased (redeemed) by the issuing corporation or when they are converted into common stock by bondholders. Explain the differences in accounting for redeeming bonds before maturity and converting bonds into common stock.
Solution 183 When bonds are retired before maturity, it is necessary to eliminate the carrying value of the bonds at the redemption date and recognize a gain or loss on redemption. The gain or loss is the difference between the cash paid and the carrying value of the bonds. When bonds are converted into common stock, no gain or loss is recognized. Instead, the carrying value of the bonds is transferred to paid-in capital accounts--Common Stock and Paid-in Capital in Excess of Par Value.
11 - 40 Test Bank for Financial Accounting, Fifth Edition S-A E 184 (Ethics)
Goodwin Company maintains two separate accounts payable computer systems. One is known to all the users, and is used to process payments to vendors. Employees enter the vendor code, or the name and address of new vendors, the amount, the account, and so on. The other system is a secret one. It is used to cross-check the vendors against an approved vendor list. If a vendor is not listed as approved, the payment process is halted. Internal audit employees seek to verify the existence of a bona fide claim by the vendor. All inquiries are made at the top management level, and very discreetly. No one but top management, the internal audit staff, and the Board of Directors of the company is even aware of the second system. Required: Is it ethical for a company to have a secret system like the one described? Explain.
Solution 184 Secret systems that seek to verify the integrity of the non-secret primary system are certainly ethical. In fact, nearly all fraud and theft detection systems are secret. It is only the mis-use of these systems, such as to obtain unauthorized information, or to commit some other crime, that is unethical.
S-A E 185
(Communication)
Trudy Jones works for Worth Press, a fairly large book publishing firm. Her best friend and rival, Linda Lang works for Lifeline Books, a smaller publisher. Both companies issue $100,000 in bonds on July 1. Worth's bonds were issued at a discount, while Lifeline's were issued at a premium. Linda sent Trudy a fax the next day. She told Trudy that it was obvious who the better publisher was--the market had shown its preference! She reminded Trudy again of her recent increase in salary as further proof of the superiority of Lifeline Books. Required: Draft a short note for Trudy to send to Linda. Explain how such a result could occur.
Liabilities Solution 185
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Many answers are possible. The format should be fairly informal, and the point that a discount or premium is not necessarily a judgment on the strength or weakness of a company should be addressed. A suggested note follows:
Linda-- I can't believe that Lifeline can survive with people like you handling their money! I also can't believe their lack of judgment in giving you a raise! Just kidding! Seriously, though, you can't prove that Worth is a bad company just by the bond price. Our bonds were issued at a discount, not because of the market's evaluation of our company, but because we underestimated interest rates. Lifeline got a premium because it overestimated interest rates. You'll have to find some other evidence to prove your company is better, (which you can't, because it isn't.) Seriously (again), congratulations on your raise. Shall we still meet for lunch on Wednesday? How about trying our luck with chopsticks at the Chinese Panda? Let me know if your plans change. (signed)
11 - 42 Test Bank for Financial Accounting, Fifth Edition
Brief Exercises
BE 186 Identify which of the following would be classified as current liabilities as of December 31, 2005: 1. Wages Payable 2. Bonds Payable, maturing in 2010 3. Interest Payable, due July 1, 2006 4. Taxes Payable 5. Notes Payable, due January 30, 2006 Solution 186 Current liabilities include: Wages Payable, Taxes Payable, Notes Payable, Interest Payable BE 187 On December 1, Destin Corporation borrowed $5,000 on a 60-day, 6% note. Prepare the entries to record the issuance of the note, the accrual of interest at year end, and the payment of the note. Solution 187 Dec 1 Cash Notes Payable Dec 31 Interest Expense Interest Payable Feb 1 Interest Expense Interest Payable Notes Payable Cash
5,000 5,000 25 25 25 25 5,000 5,050
BE 188 During December 2005, Fashion Vixen Publishing sold 2,500 12-month annual magazine subscriptions at a rate of $30 each. The first issues were mailed in February 2006. Prepare the entries on the books to Fashion Vixen to record the sale of the subscriptions and the mailing of the first issues. Solution 188 December 2005 Cash Unearned Revenue (2,500 * $30 = $75,000) February 2006 Unearned Revenue Subscription Revenue ($75,000/ 12 = $6,250)
75,000 75,000
6,250 6,250
BE 189 On January 1, 2005, Beltway Enterprises issued 11%, 5-year bonds with a face amount of $900,000 at par. Interest is payable semi-annually on June 30 and December 31. Prepare the entries to record the issuance of the bonds and the first semi-annual interest payment.
Liabilities Solution 189 Jan 1 Cash Bonds Payable
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900,000 900,000
June 30 Interest Expense Cash ($900,000 * .11/2 = $49,500)
49,500 49,500
BE 190 On January 1, 2005, Fabian Enterprises issued 9%, 10-year bonds with a face amount of $700,000 at 98. Interest is payable semi-annually on June 30 and December 31. Prepare the entries to record the issuance of the bonds and the first semi-annual interest payment assuming that the company uses straight-line amortization. Solution 190 Jan 1 Cash Discount on Bonds Payable Bonds Payable ($700,000 *.98 = $686,000) June 30 Interest Expense Discount on Bonds Payable Cash ($700,000 * .09/2 = $31,500) ($14,000/ 20 = $700)
686,000 14,000 700,000
32,200 700 31,500
BE 191 On January 1, 2005, Halston Enterprises issued 8%, 20-year bonds with a face amount of $3,000,000 at 101. Interest is payable semi-annually on June 30 and December 31. Prepare the entries to record the issuance of the bonds and the first semi-annual interest payment assuming that the company uses straight-line amortization. Solution 191 Jan 1 Cash Premium on Bonds Payable Bonds Payable ($3,000,000 *1.01 = $3,030,000) June 30 Interest Expense Premium on Bonds Payable Cash ($3,000,000 * .08/2 = $120,000) ($30,000/ 40 = $750)
3,030,000 30,000 3,000,000
119,250 750 120,000
BE 192 On January 1, 2005, Zooland Enterprises sold 12%, 10-year bonds with a face amount of $1,000,000 for $970,000 . Interest is payable semi-annually on July 1 and January 1. Calculate the carrying value of the bond at December 31, 2005 and 2006
11 - 44 Test Bank for Financial Accounting, Fifth Edition
Solution 192 Annual amortization of discount: $30,000/ 20 = $1,500 December 31, 2005: $1,000,000 ($30,000- 1,500) = $971,500 December 31, 2006: $1,000,000 ($30,000 3,000) = $973,000 BE 193 On January 1, 2005, Xavier Enterprises sold 10%, 5-year bonds with a face amount of $2,000,000 for $2,024,000 . Interest is payable semi-annually on July 1 and January 1. Calculate the carrying value of the bond at December 31, 2005 and the amount of interest expense that would be reported on the 2005 income statement for the bonds (use straight-line amortization). Solution 193 Annual amortization of premium: $24,000/ 10 = $2,400 December 31, 2005 carrying value: $2,000,000 + (24,000 2,400) = $2,021,600 2005 interest expense: ($2,000,000 * .10) 2,400 = $197,600 BE 194 Delta Company issued bonds with a face amount of $1,000,000 in 2000. As of January 1, 2005, the balance in Discount on Bonds Payable is $4,800. At that time, Delta redeemed the bonds at 102. Assuming that no interest is payable, make the entry to record the redemption. Solution 194 Jan 1 Bonds Payable Gain on Bond Redemption Discount on Bonds Payable Cash
1,000,000 24,800 4,800 1,020,000
BE 195 Franco Corporation reports the following selected financial statement information at December 31, 2005: Total Assets $89,000 Total Liabilities 65,000 Net Income 27,000 Interest Income 1,600 Interest Expense 900 Tax Expense 300 Calculate the debt to total assets and times interest earned ratios. Solution 195 Debt to total assets: $65,000/ 89,000 = 73% Times interest earned: ($27,000 + 900 + 300) / 900 = 31.33 times