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Exam 7: Accounting for Liabilities

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Question 41

Multiple Choice

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Madison Company issued an interest-bearing note payable with a face amount of $24,000 and a stated interest rate of 8% to the Metropolitan Bank on August 1, Year 1. The note carried a one-year term. Based on this information alone, the amount of total liabilities appearing on Madison's Year 1 balance sheet would be:

A) $24,720
B) $24,800
C) $25,920
D) $24,000

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Question 42

Multiple Choice

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Franklin Company issued a $40,000 note to the Mercantile Bank on August 1, Year 1. The note carried a one-year term and a 12% rate of interest. The accrual of interest on December 31, Year 1 will:

A) Decrease assets and decrease retained earnings by $2,000.
B) Increase liabilities and decrease equity by $2,000.
C) Increase liabilities and decrease equity by $1,600.
D) Decrease equity and increase liabilities by $4,800.

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Question 43

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If a bond discount is amortized using the effective interest method, the total amount of interest recognized over the life of the bond is the same as if the straight-line method is used.

Weller Company issued bonds with a face value of $400,000, a 10% stated rate of interest, and a 10-year term. The bonds were issued on January 1, Year 1, and Weller uses the effective interest method of amortization. The market rate of interest on the date of issue was 8%. Interest is paid annually on December 31. Assuming Weller issued the bonds for $431,940, the carrying value of the bonds on the December 31, Year 3 balance sheet would be closest to:

Loans that require payment of interest at regular intervals and payment of principal at maturity are installment notes.

Indicate whether each of the following statements is true or false. _____ a) The amount of warranty expense is an estimate that is based on the amount of merchandise sold. _____ b) A warranty obligation only occurs if a buyer purchases an extended warranty. _____ c) When a warranty claim is made, the seller's equity decreases. _____ d) When a warranty claim is settled, the seller's liabilities increase. _____ e) Product warranties usually represent legal liabilities that must be reported in the financial statements.

Marvin Company issues $125,000 of bonds at face value on January 1. The bonds carry a 6% annual stated rate of interest. Interest is payable in cash on December 31 of each year. Which of the following reflects the financial statement effects of the first interest payment?

Indicate whether each of the following statements is true or false. _____ a) An eight-month, 6% note for $10,000 will require the issuer to pay $600 in interest. _____ b) Interest expense is considered an operating expense on the income statement. _____ c) Payment of interest is considered an operating activity on the statement of cash flows. _____ d) Payment of interest on a one-year note due on March 1 will include a reduction in liabilities. _____ e) The accrual of interest expense is an asset use transaction.

On January 1, Year 1, the Mahoney Company borrowed $324,000 cash from Sun Bank by issuing a five-year 8% term note. The principal and interest are repaid by making annual payments beginning on December 31, Year 1. The annual payment on the loan based on the present value of annuity factor would be $81,150. Which choice reflects the financial statement effects of the cash payment on December 31, Year 1?

On January 1, Year 1, Daniels Company issued bonds with a face value of $500,000, receiving $496,000 cash. When the bonds mature, Daniels will have to pay the face value of the bonds to the bondholders.

Joseph Company is preparing to repay a one-year note on May 1, Year 1. The first step in this process is to accrue eight months of interest expense.

On January 1, Year 1, Pierce Corporation issued $25,000 in 8%, 5-year bonds payable at 102. Interest payments are due each December 31. Pierce uses the straight-line method of amortization. Which of the following shows the effect of the interest payment and amortization on December 31, Year 1?

If a company is located in an area where floods or earthquakes are deemed to be possible, the company should record a contingent liability.

West Company borrowed $10,000 on September 1, Year 1 from the Valley Bank. West agreed to pay interest annually at the rate of 6% per year. The note issued by West carried an 18-month term. Based on this information the amount of interest expense appearing on West's Year 1 income statement would be:

If a company offers a warranty on the products it sells, the company records the warranty expense at the time that service is provided to customers under the terms of the warranty.

Bluestone Company issued bonds with a face value of $500,000 on January 1, Year 1 at 90. How would this event affect the company's financial statements?

Amortization of a discount on bonds payable is an asset use transaction.

Peak Enterprises issued bonds with a face value of $500,000, receiving cash of $508,000. To record this event, Bonds Payable should be increased for $500,000.

Davis Corporation borrowed $50,000 on January 1, Year 1. The loan is for a ten-year period and has an annual interest rate of 9%. At the end of each year, Davis will make a payment of $7,791, which includes both principal and interest. With this loan, the amount of interest expense that Davis reports on its income statement will be the same for each year of the loan.

Madison Company issued an interest-bearing note payable with a face amount of $24,000 and a stated interest rate of 8% to the Metropolitan Bank on August 1, Year 1. The note carried a one-year term. The amount of cash flow from operating activities on the Year 1 statement of cash flows would be: