Ch.10 Wiley Plus MC

The time period for classifying a liability as current is one year or the operating cycle, whichever is

Longer.

To be classified as a current liability, how or when must a debt be expected to be paid?

Either out of existing current assets or by creating other current liabilities.

Which one of the following is not a typical current liability?

Bonds payable.

Which of the following is a criterion for the classification of a liability as current?
I. It is a debt that can be paid from existing current assets.
II. It is a debt that can be paid through the creation of other current liabilities.
III. It must be paid within one year or the operating cycle, whichever is shorter.

I and II.

Which one of the following is not a current liability?

Mortgages payable.

Which of the following is not a typical current liability?

Prepaid rent.

A corporation issued a $50,000, 9%, 4-month note on July 1. The corporation’s year-end is September 30. Which one of the following is the adjusting entry for interest on September 30?

Interest Expense 1,125 Interest Payable 1,125

On September 1, Banner Co. borrowed $70,000 from the City Bank for five months at 9%. Which journal entry will Banner Co. make on December 31 before issuing its financial statements?

Interest Expense 2,100 Interest Payable 2,100

On September 1, 2012, Banner Co. borrowed $70,000 from the City Bank for five months at 9%. Interest was properly accrued on December 31, 2012. What entry is needed to record the payment of the note and accrued interest on the due date?

Notes Payable 70,000 Interest Payable 2,100 Interest Expense 525 Cash 72,625

Buttner Company borrows $88,500 on September 1, 2012, from Harrington State Bank by signing an $88,500, 12%, one-year note. How much is accrued interest at December 31, 2012?

$3,540.

RS Company borrowed $70,000 on December 1 on a 6-month, 12% note. Which statement is true at December 31?

Both the note payable and the interest payable are current liabilities.

Andre Company collected $4,515 from cash sales to customers, which includes both sales revenue and 5% sales taxes. How much should be recognized as sales revenue?

$4,300. (The amount of sales can be computed by dividing total cash received by one plus the sales tax rate of 5%. The computation is as follows: $4,515/1.05 = $4,300)

When recording payroll,

Payroll deductions are recorded as liabilities.

Sensible Insurance Company collected a premium of $18,000 for a 1-year insurance policy on April 1. What amount should Sensible report as a current liability for Unearned Insurance Premiums at December 31?

$4,500. (The portion of the premiums not yet earned should be recognized as a liability by Sensible. Since there are 3 months remaining on the insurance policy, the remaining liability is 3/12 of $18,000 or $4,500.)

As what are sales taxes recorded at the time the sale takes place?

A liability.

The cash register tape indicates cash sales are $2,000 and sales taxes are $155. What journal entry is needed to record this information?

Cash 2,155 Sales 2,000 Sales Taxes Payable 155

The Jacksonville Jaguars sell season tickets to NFL football games. There are 10 home games during the season, which runs from August through December. During February, 65,000 season tickets were sold for $12,000,000 cash. Which account will be credited by the Jacksonville Jaguars upon receipt of the $12,000,000?

Unearned Ticket Revenue.

On December 30, 2012, a company issued a note payable of $50,000, of which $10,000 will be repaid each year. What is the proper classification of this note on the December 31, 2012, balance sheet?

$10,000 current liability; $40,000 long-term liability.

At what point and how are sales taxes charged to customers recorded?

At the time of the sale as a liability.

A corporation issues $1,000,000 of 8%, 5-year bonds. The 8% rate of interest is called the __________ rate.

Contractual.

To what is the current market value of a bond equal?

Present value of the principal and the present value of the interest payments.

How is the market value of a bond issuance determined?

By adding the present value of the principal amount to the present value of the interest payments.

In what denomination are bonds typically issued?

$1,000.

What term is used for bonds that have specific assets pledged as collateral?

Secured bonds.

Which statement describes the market interest rate?

It is the rate investors demand for loaning funds.

Cuso Inc. issues 10-year bonds with a maturity value of $200,000. If the bonds are issued at a premium, what does this indicate?

The contractual interest rate exceeds the market interest rate.

On January 1, 2012, Slice Corp. issues $200,000 of 5-year, 7% bonds at face value. Which one of the following is one effect of the entry to record the issuance of the bonds?

Credit to Bonds Payable for $200,000. (The issuance entry for the bonds includes a debit to cash for $200,000 and a credit to bonds payable for $200,000.)

Four-Nine Corporation issued bonds at par that pay interest every July 1 and January 1. Which one of the following is one effect of the entry to accrue bond interest at December 31?

Credit to Interest Payable. (Since the interest has been accrued but not yet paid, it has to be recognized as an increase in expenses and liabilities. The entry would be a debit to Interest Expense and a credit to Interest Payable.)

When a bond is sold at a premium, at what amount is it reported on the balance sheet?

Carrying value.

What is the effect of amortizing a bond discount?

It increases the carrying value of the bonds. (The amortization of a bond discount increases the carrying value of the bond issue because as the discount is reduced, the net amount, or carrying value increases.)

Tanner, Inc. issued a 10%, 5-year, $100,000 bond when the market rate of interest was 12%. At what value will the bond sell?

A discount.

Hanlin Enterprises issued 2,000 bonds with a face value of $1,000 each at 97. What is the entry to record the issuance?

Cash 1,940,000 Discount on Bonds Payable 60,000 Bonds Payable 2,000,000

Sosa Corporation issued 10-year bonds with a face value of $400,000 and a contractual rate of interest of 6% at 99 on July 1. What is the total cost of borrowing for Sosa Corporation?

$244,000. (The total cost is the sum of the interest payments and the difference between the cash received from bondholders and the maturity value of the bonds. Principal at maturity $400,000 Annual interest payments: $400,000 × 6% × 10 years 240,000 Cash paid to bondholders 640,000 Cash received from bondholders (99% × $400,000) 396,000 Total cost of borrowing $244,000)

What is the nature of a bond premium?

It reduces the cost of borrowing.

Kant Corporation retires its $100,000 face value bonds at 105 on January 1, following the payment of interest. The carrying value of the bonds at the redemption date is $103,745. Which of the following is part of the entry to record the bond redemption?

A debit of $3,745 to Premium on Bonds Payable. (The entry removes the face amount of the bonds from the Bonds Payable account, removes the remaining Premium on Bonds Payable, records the cash paid on retirement, and recognizes a gain or loss on redemption for the difference.The entry to record this transaction will have debits to Bonds Payable for $100,000, Premium on Bonds Payable for $3,745 and Loss on Retirement for $1,255. The credit will be to cash for $105,000.)

Bonds payable with a face value of $200,000 and a carrying value of $196,000 are redeemed prior to maturity at 102. Which of the following will result?

Loss on redemption of $8,000. (The difference between the carrying value and the cash used to redeem the bonds is a gain or loss on redemption. The company had to pay $204,000 for bonds with a carrying value of $196,000. The difference between the $204,000 and $196,000 is the loss on redemption.)

A $500,000 bond is retired at 97 when the carrying value of the bond is $483,000. Which of the following is one effect of recording the retirement?

A $2,000 loss. (The difference between the carrying value and the cash used to redeem the bonds is a gain or loss on redemption. Since the bonds were retired for $485,000 ($500,000 × 97%) and the carrying value is $483,000, the company should record a loss of $2,000.)

A $500,000 bond is retired at 101¼ when the unamortized premium is $4,500. Which of the following is one effect of recording the retirement?

A $1,750 loss. (The difference between the carrying value and the cash used to redeem the bonds is a gain or loss on redemption. The bonds were retired for $506,250 ($500,000 × 101¼%) and the carrying value is $504,500, resulting in a loss of $1,750.)

Nashville Rail Co. issued $100,000 in 10-year bonds in 2009 at 103. The final interest payment was made and recorded. What entry will Nashville record for the redemption of its bonds at maturity?

Bonds Payable 100,000 Cash 100,000

Which of the following is not a commonly used method of presenting current liabilities on the balance sheet?

Listing current debt in the order of oldest first and then chronologically.

Which is a very common way to present current liabilities on the balance sheet?

Notes payable are listed first.

When a bond is sold at a premium, at what value is it reported on the balance sheet?

Face value plus any premium.