Chapter 10 FA

All of the following are reported as current liabilities except
a. accounts payable.
b. bonds payable.
c. notes payable.
d. unearned revenues.

b. bonds payable.
A current liability is a debt that can reasonably be expected to be paid
a. within one year or the operating cycle, whichever is longer.
b. between 6 months and 18 months.
c. out of currently recognized revenues.
d. out of cash currently on hand.

a. within one year or the operating cycle, whichever is longer.
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.

c. short-term debt paying ability.
The entry to record the issuance of an interest-bearing note credits Notes Payable for the note’s
a. maturity value.
b. market value.
c. face value.
d. cash realizable value.

c. face value.
The entry to record the proceeds upon issuing an interest-bearing note is
a. Interest Expense
Cash
Notes Payable
b. Cash
Notes Payable
c. Notes Payable
Cash
d. Cash
Notes Payable
Interest Payable

b. Cash
Notes Payable
Admire County Bank agrees to lend Givens Brick Company $300,000 on January 1. Givens Brick Company signs a $300,000, 8%, 9-month note. The entry made by Givens 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

b. Cash 300,000
Notes Payable 300,000
As interest is recorded on an interest-bearing note, the Interest Expense account is
a. increased; the Notes Payable account is increased.
b. increased; the Notes Payable account is decreased.
c. increased; the Interest Payable account is increased.
d. decreased; the Interest Payable account is increased.

c. increased; the Interest Payable account is increased.
On October 1, Steve’s Carpet Service borrows $250,000 from First National Bank on a 3-month, $250,000, 8% note. The entry by Steve’s Carpet Service to record payment of the note and accrued interest on January 1 is
a. Notes Payable 255,000
Cash 255,000
b. Notes Payable 250,000
Interest Payable 5,000
Cash 255,000
c. Notes Payable 250,000
Interest Payable 20,000
Cash 270,000
d. Notes Payable 250,000
Interest Expense 5,000
Cash 255,000

b. Notes Payable 250,000
Interest Payable 5,000
Cash 255,000
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.

c. crediting Sales Taxes Payable.
Unearned Rent Revenue is
a. a contra account to Rent Revenue.
b. a revenue account.
c. reported as a current liability.
d. debited when rent is received in advance.

c. reported as a current liability.
Sales taxes collected by the retailer are recorded as a(n)
a. revenue.
b. liability.
c. expense.
d. asset.

b. liability.
The interest charged on a $200,000 note payable, at the rate of 8%, on a 90-day note would be
a. $16,000.
b. $8,888.
c. $4,000.
d. $1,333.

c. $4,000.
On October 1, 2013, Pennington Company issued an $80,000, 10%, nine-month interest-bearing note. If the Pennington Company is preparing financial statements at December 31, 2013, the adjusting entry for accrued interest will include a:
a. credit to Notes Payable of $2,000.
b. debit to Interest Expense of $2,000
c. credit to Interest Payable of $4,000.
d. debit to Interest Expense of $3,000.

b. debit to Interest Expense of $2,000
Reliable Insurance Company collected a premium of $30,000 for a 1-year insurance policy on May 1. What amount should Reliable report as a current liability for Unearned Insurance Revene at December 31?
a. $0.
b. $10,000.
c. $20,000.
d. $30,000.

b. $10,000.
A retail store credited the Sales Revenue 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 Revenue account amounted to $525,000, what is the amount of the sales taxes owed to the taxing agency?
a. $500,000
b. $525,000
c. $26,250
d. $25,000

d. $25,000
Layton Company does not ring up sales taxes separately on the cash register. Total receipts for October amounted to $27,300. If the sales tax rate is 5%, what amount must be remitted to the state for October’s sales taxes?
a. $1,300
b. $1,365
c. $65
d. It cannot be determined.

a. $1,300
Advances from customers are classified as a(n)
a. revenue.
b. expense.
c. current asset.
d. current liability.

d. current liability.
Sales taxes collected by a retailer are reported as
a. contingent liabilities.
b. revenues.
c. expenses.
d. current liabilities.

d. current liabilities.
Any balance in an unearned revenue account is reported as a(n)
a. current liability.
b. long-term debt.
c. revenue.
d. unearned liability.

a. current liability.
Kelly Rice 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 Rice account for the cash received at the end of the engagement?
a. Cash
Unearned Service Revenue
b. Cash
Service Revenue
c. Prepaid Service Fees
Service Revenue
d. No entry is required when the engagement is concluded.

b. Cash
Service Revenue
Current liabilities generally appear
a. after long-term debt on the balance sheet.
b. in decreasing order of magnitude on the balance sheet.
c. in order of maturity on the balance sheet.
d. in increasing order of magnitude on the balance sheet.

b. in decreasing order of magnitude on the balance sheet.
From the standpoint of the issuing company, a disadvantage of using bonds as a means of long-term 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.

b. interest must be paid on a periodic basis regardless of earnings.
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.

a. a bond indenture.
Bonds that are secured by real estate are termed
a. mortgage bonds.
b. serial bonds.
c. debentures.
d. bearer bonds.

a. mortgage bonds.
Bonds that are not registered are
a. bearer bonds.
b. debentures.
c. registered bonds.
d. transportable bonds.

a. bearer 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.

b. bearer bond.
Investors who receive checks in their names for interest paid on bonds must hold
a. registered bonds.
b. coupon bonds.
c. bearer bonds.
d. direct bonds.

a. registered bonds.
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.

b. interest must be paid on a periodic basis.
A bond trustee does not
a. issue the bonds.
b. keep a record of each bondholder.
c. hold conditional title to pledged property.
d. maintain custody of unsold bonds.

a. issue the bonds.
A $1,000 face value bond with a quoted price of 97 is selling for
a. $1,000.
b. $970.
c. $907.
d. $97.

b. $970.
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.

c. at a discount.
Premium on Bonds Payable
a. has a debit balance.
b. is a contra account.
c. is considered to be a reduction in the cost of borrowing.
d. is deducted from bonds payable on the balance sheet.

c. is considered to be a reduction in the cost of borrowing.
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.

b. bonds were issued at a discount.
The present value 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.

a. contractual interest rate is less than the market interest rate.
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.

b. will cause the total cost of borrowing to be less than the bond interest paid.
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.

c. the same whether bonds sell at a discount or a premium.
The current carrying value of Kane’s $900,000 face value bonds is $897,000. If the bonds are retired at 103, what would be the amount Kane would pay its bondholders?
a. $897,000
b. $900,000
c. $906,000
d. $927,000

d. $927,000
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.

c. the market price of the stock and the bonds is ignored when recording the conversion.
On March 31, 2014, $5,000,000 of 6%, 10-year bonds payable, dated December 31, 2013, are issued. Interest on the bonds is payable semiannually each June 30 and December 31. The total amount received (including accrued interest) by the issuing corporation is $5,060,000. Which of the following is correct?
a. The bonds were issued at a premium.
b. The amount of cash paid to bondholders on the next interest date, June 30, 2013, is $300,000.
c. The amount of cash paid to bondholders on the next interest date, June 30, 3013, is $50,000.
d. The bonds were issued at a discount.

d. The bonds were issued at a discount.
Farris Company borrowed $800,000 from BankTwo on January 1, 2012 in order to expand its mining capabilities. The five-year note required annual payments of $208,349 and carried an annual interest rate of 9.5%. What is the amount of expense Farris must recognize on its 2013 income statement?
a. $76,000
b. $63,427
c. $56,206
d. $49,659

b. $63,427

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