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The Music House issues a contract to a new recording artist to produce a number of albums over the next five years at $1 million per album. This situation is an example of:


A) A contingent liability which should be recorded in the accounting records.
B) A contingent liability requiring footnote disclosure.
C) A provision, since the number of albums to be produced is not yet determined.
D) A commitment which, if material, may be disclosed in a footnote.

E) B) and C)
F) A) and B)

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Which of the following is characteristic of liabilities, rather than of equity? (More than one answer may be correct.)


A) The obligation matures.
B) Interest paid to the provider of the capital is deductible in the determination of taxable income.
C) The capital providers' claims are residual in the event of liquidation of the business.
D) The capital providers normally have the right to exercise control over business operations.

E) B) and D)
F) A) and B)

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Which of the following is not an accurate statement regarding the distinction between debt and equity?


A) Only equity is considered a source of financing for operations of the business, since debt must be repaid at a specified maturity date.
B) If a business ceases operations and liquidates, claims of all creditors have legal priority over claims of the shareholders.
C) Most debt requires the borrower to pay interest; equity financing does not obligate the company to make a specified payment.
D) The providers of equity are owners of the business; the providers of borrowed funds are creditors.

E) None of the above
F) C) and D)

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A

The amount of the present value of a future cash receipt will depend upon


A) The length of time until the money is received.
B) The amount of money to be received.
C) The required rate of return.
D) The amount of money to be received, the length of time until the money is received, and the required rate of return.

E) B) and D)
F) B) and C)

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Ultimate Company is a defendant in a lawsuit alleging damages of $3 billion. The litigation is expected to continue for several years, and no reasonable estimate can be made at this time of Ultimate Company's ultimate financial responsibility. This situation is an example of:


A) Off-balance-sheet financing.
B) A contingent liability which should be disclosed in notes to Ultimate Company's financial statements.
C) A provision which must appear in Ultimate Company's statement of financial position.
D) A loss in purchasing power caused by inflation.

E) None of the above
F) A) and C)

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A basic difference between Contingent Liabilities and "real" liabilities is:


A) Liabilities stem from past transactions; Contingent Liabilities stem from future events.
B) Liabilities always are recorded in the accounting records, whereas Contingent Liabilities never are.
C) The extent of uncertainty involved.
D) Liabilities can be large in amount, whereas Contingent Liabilities are immaterial.

E) None of the above
F) A) and D)

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Bonds payable issued between interest dates - early retirement Deegan Imports received authorization on 31 December, Year 1, to issue $4,500,000 face value of 8%, 20-year bonds. The interest payment dates are 30 June and 31 December. All the bonds were issued at par, plus accrued interest on 1 February, Year 2. The bonds are callable by Deegan at any time at 105. (a) Prepare the journal entry to record the issuance of the bonds on 1 February, Year 2. (b) Prepare the journal to record the first interest payment on the bonds at 30 June, Year 2 (c) What is the amount of bond interest expense reported in Deegan Imports' Year 2 income statement relating to these bonds? $___________ (d) What is the amount of bond interest payable appearing in Deegan Imports' statement of financial position at 31 December, Year 2, with respect to these bonds? $____________ (e) Deegan exercises the call provision and retires one-third of the bond issue on 1 July, Year 3. Prepare the journal entry to record this transaction on 1 July, Year 3.

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(a) \(\begin{array}{|l|l|r|r|} \hline 1 \text { Feb } & \text { Cash } & 4,530,000 & \\ \hline & \text { Bond Payable } & & 4,500,000 \\ \hline & \text { Bond Interest Payable } & & 30,000 \\\hline & \begin{array}{l} \text { Issued } \$ 4,500,000 \text { face value bonds at par, } \\ \text { plus } 1 \text { month's accrued interest } \\ (\$ 4,500,000 \times 8 \% \times 1 / 12) \end{array} & &30,000 \\ \hline \end{array}\) (b) \(\begin{array}{|l|l|r|r|} \hline \text { 30 June } & \text { Bond Interest Payable } & 30,000 & \\ \hline & \text { Bond Interest Expense } & 150,000 & \\ \hline & \text { Cash } & & 180,000 \\ \hline& \begin{array}{l} \text { To record payment of semiannual interest } \\ (\$ 4,500,000 \times 8 \% \times 6 / 12) \end{array} & & \\ \hline \end{array}\) (c) $330,000 interest expense Since the bonds were issued at par, interest expense is equal to the contractual interest for the period that the bonds were outstanding. ($4,500,000 \(\times\) .08 \(\times\)11/12 = $330,000) (d) $-0- accrued bond interest payable The interest payment date is 31 December; therefore, interest for the last six months of a year is paid and does not appear as a liability in the statement of financial position at 31 December. (e) \(\begin{array}{|l|l|r|l|} \hline \text { Year 3 } & & & \\ \hline 1 \text { July } & \text { Bond Payable } & 1,500,000 & \\ \hline & \text { Loss on Early Retirement of Debt } & 75,000 & \\ \hline & \text { Cash } & & 1,575,000 \\ \hline & \begin{array}{l} \text { To record retirement of } \$ 1,500,000 \text { face } \\ \text { value bonds, originally issued at par, at 105) } \end{array} & & \\ \hline \end{array}\)

The current statement of financial position of Gamma reports total assets of $30 million, total liabilities of $3 million, and owners' equity of $27 million. Gamma is considering several financing possibilities in order to expand operations. Each question based on this data is independent of any others. -What will be the effect on Gamma's debt ratio if Gamma's owner invests an additional $5 million to finance its expansion?


A) The debt ratio will decrease from .1 (3/30) to .0857 (3/35) after the additional investment.
B) The debt ratio will decrease from 3/27 before to 3/32 after the additional investment.
C) The debt ratio will increase from 30 before to 35 after the additional investment.
D) Additional investment by owner will have no effect on the debt ratio.

E) None of the above
F) All of the above

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Payments of pensions and other benefits to retired workers are recognized as expense in the period payment is made.

A) True
B) False

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On 1 April, year 1, Greenway Corporation issues $20 million of 10%, 20-year bonds payable at par. Interest on the bonds is payable semiannually each 1 April and 1 October. -The journal entry to record the first cash payment to bondholders on 1 October, year 1, will include:


A) A credit to Cash of $2,000,000.
B) A debit to Bonds Payable of $1,000,000.
C) A debit to Interest Expense of $1,000,000
D) A credit to Interest Payable of $1,000,000.

E) A) and B)
F) A) and C)

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What is the maximum amount Apex can borrow and not exceed a debt ratio of .3?


A) $4,000,000.
B) $5,500,000.
C) $5,000,000.
D) $6,000,000.

E) C) and D)
F) A) and B)

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When money is borrowed by issuing a note payable, the borrower records a liability equal to the maturity value of the note.

A) True
B) False

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The quick ratio is a more stringent measure of solvency than the current ratio.

A) True
B) False

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Interest payable on a loan becomes a liability:


A) When the note payable is issued.
B) As it accrues.
C) At the maturity date.
D) When the borrowed money is received.

E) A) and B)
F) B) and C)

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Bonds payable are a means of dividing a very large, long-term liability among many creditors some of whom may participate in the loan only for a short period of time.

A) True
B) False

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Bonds, with the same face value, issued at a premium will:


A) Have a greater maturity value than a bond issued at a discount.
B) Have a lesser maturity value than a bond issued at a discount.
C) Have the same maturity value as a bond issued at a discount.
D) Have a different maturity value than a bond issued at a discount, depending upon the interest rate and maturity date.

E) None of the above
F) B) and D)

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C

Shown below is a summary of the annual payroll data of Rose Co.:  Wages and salaries expense (gross pay)  250,000 Amounts withheld forn  Income taxes$170,000 Social Security and Medical care $150,000320,000 Payroll taxes expense:  Social Security and Medical care $150,000 Unemployment taxes 58,000208,000 Workers’ compensation premiums 130,000 Group health insurance premiums (paid by employer)  252,000 Contributions to employees’ pension plan (paid by  employer and fully funded) . 140,0 Cost of other postretirement benefits:  Funded$90,000 Unfunded120,000210,000\begin{array}{lcc} \text { Wages and salaries expense (gross pay) } & & 250,000 \\ \text { Amounts withheld forn } & & \\ \text { Income taxes} & \$ 170,000 & \\ \text { Social Security and Medical care } & \$ 150,000 & 320,000 \\ \text { Payroll taxes expense: } & & \\ \text { Social Security and Medical care } & \$ 150,000 & \\\text { Unemployment taxes } & 58,000 & 208,000 \\ \text { Workers' compensation premiums } & & 130,000 \\ \text { Group health insurance premiums (paid by employer) } & & 252,000 \\ \text { Contributions to employees' pension plan (paid by } & & \\ \text { employer and fully funded) . } & & 140,0 \\ \text { Cost of other postretirement benefits: } & & \\\text { Funded} & \$ 90,000 & \\\text { Unfunded} & 120,000 & 210,000 \\\end{array} -Rose Company's total payroll-related expense for the year is:


A) $2,250,000.
B) $3,510,000.
C) $2,840,000.
D) $3,190,000.

E) A) and B)
F) A) and C)

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Special purpose entities (SPEs) are established by corporations to accomplish specific purposes such as borrowing money.

A) True
B) False

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Shown below is a summary of the annual payroll data of Rose Co.:  Wages and salaries expense (gross pay)  250,000 Amounts withheld forn  Income taxes$170,000 Social Security and Medical care $150,000320,000 Payroll taxes expense:  Social Security and Medical care $150,000 Unemployment taxes 58,000208,000 Workers’ compensation premiums 130,000 Group health insurance premiums (paid by employer)  252,000 Contributions to employees’ pension plan (paid by  employer and fully funded) . 140,0 Cost of other postretirement benefits:  Funded$90,000 Unfunded120,000210,000\begin{array}{lcc} \text { Wages and salaries expense (gross pay) } & & 250,000 \\ \text { Amounts withheld forn } & & \\ \text { Income taxes} & \$ 170,000 & \\ \text { Social Security and Medical care } & \$ 150,000 & 320,000 \\ \text { Payroll taxes expense: } & & \\ \text { Social Security and Medical care } & \$ 150,000 & \\\text { Unemployment taxes } & 58,000 & 208,000 \\ \text { Workers' compensation premiums } & & 130,000 \\ \text { Group health insurance premiums (paid by employer) } & & 252,000 \\ \text { Contributions to employees' pension plan (paid by } & & \\ \text { employer and fully funded) . } & & 140,0 \\ \text { Cost of other postretirement benefits: } & & \\\text { Funded} & \$ 90,000 & \\\text { Unfunded} & 120,000 & 210,000 \\\end{array} -Amounts paid during the year to retirees for pension and other postretirement benefits total:


A) $140,000.
B) $350,000.
C) $230,000.
D) None of above.

E) A) and B)
F) B) and C)

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Amortizing a discount on bonds payable:


A) Increases interest expense.
B) Increases periodic cash payments to bondholders.
C) Decreases interest expense.
D) Decreases periodic cash payments to bondholders.

E) B) and C)
F) B) and D)

Correct Answer

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Showing 1 - 20 of 213

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