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Match each term with the appropriate definition.Not all definitions will be used. -Times interest earned ratio


A) Liquid assets divided by current liabilities.
B) A calculation that determines what some future payments are worth today.
C) The ability to pay current obligations.
D) These are liabilities that have to be paid in one year or less.
E) A bond feature that puts a creditor ahead of other creditors in order of payment.
F) Net income before taxes and interest expense divided by interest expense.
G) Where interest expense is the market interest rate times the bond's carrying value.
H) Current liabilities divided by current assets.
I) These are liabilities that do not have to be paid within the upcoming year.
J) Net income after taxes and interest expense divided by interest expense.
K) Spreads a bond discount or premium evenly over the lifetime of the bond.
L) The amount of all the liabilities currently on the balance sheet at the close of the period.

M) J) and K)
N) A) and B)

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Brief Respite,Inc.sold underwear made from a fabric that gave many of its customers a serious rash.The customers are suing the company in a class action suit.Although the verdict is not yet in,Brief Respite's attorneys think it is probable that the case will cost the company $2 million.The company should:


A) not include this information in its annual report.
B) record a liability and a gain for $2 million.
C) only explain the situation in the notes to the financial statements.
D) record a liability and a loss for $2 million.

E) All of the above
F) C) and D)

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On October 1,2018,Saddleback,Inc.negotiates with its bank to borrow $18,000 cash on a one-year note.The bank charges 5% interest.Interest payments are to be made in two installments,on March 31 and September 30.The principal is to be repaid on September 30,2019,the maturity date.What adjusting entry needs to be recorded of December 31,2018?


A) Debit Interest Expense and credit Interest Payable for $450.
B) Debit Interest Expense and credit Interest Payable for $225.
C) Debit Interest Expense and credit Interest Payable for $900.
D) Debit Interest Payable and credit Interest Expense for $900.

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

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The Discount on Bonds Payable account is reported in the financial statements as:


A) a reduction from the Bond Payable account on the balance sheet.
B) an expense on the income statement.
C) an asset on the balance sheet.
D) revenue on the income statement.

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

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Contingent liabilities must be recorded if the:


A) future event is reasonably possible.
B) amount owed cannot be reasonably estimated.
C) future event is probable and the amount owed can be reasonably estimated.
D) future event is remote.

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

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When a company issues bonds that include no periodic interest payments,the bonds are referred to as "zero-coupon" bonds.

A) True
B) False

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Because interest rates have fallen,a company retires bonds which had been issued at their face value of $200,000.The company bought the bonds back at 97.The journal entry to record this retirement includes a debit of:


A) $200,000 to Bonds Payable,a credit of $6,000 to Gain on Bond Retirement,and a credit of $194,000 to Cash.
B) $194,000 to Bonds Payable,a debit to Gain on Bond Retirement of $6,000,and a credit of $200,000 to Cash.
C) $200,000 to Bonds Payable,a credit of $6,000 to Interest Expense,and a credit of $194,000 to Cash.
D) $194,000 to Bonds Payable and a credit of $194,000 to Cash.

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

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Bonds that are backed by collateral are referred to as:


A) debentures.
B) secured.
C) callable.
D) convertible.

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

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Some bonds mature in installments.If a bond issue contains this feature,the bonds are known as:


A) secured bonds.
B) convertible bonds.
C) callable bonds.
D) serial bonds.

E) B) and D)
F) All of the above

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The annual interest payment on bonds:


A) increases over the life of the bonds when bonds are issued at a discount.
B) decreases over the life of the bonds when bonds are issued at a discount.
C) stays constant over the life of the bonds,regardless of whether bonds are issued at par,a discount,or a premium.
D) increases over the life of the bonds under the effective-interest method,but stays constant under the straight-line method of amortization.

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

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On October 1,Pinnacle Co.signs a note for $360,000 to provide the funds needed to build a new facility.The note is due in 10 years,includes an annual interest rate at 7%,and requires semiannual interest payments each April and October.The journal entry to record the issuance of the promissory note should debit:


A) Notes Payable for $360,000,debit Interest Expense for $25,200,credit Cash for $360,000,and credit Interest Payable for $25,200.
B) Accrued Interest and credit Cash for $25,200.
C) Cash and credit Notes Payable for $360,000.
D) Cash for $360,000,debit Interest Expense for $25,200,credit Notes Payable for $360,000,and credit Interest Payable $25,200.

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

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A company pays $18,000 in interest on notes,consisting of $12,000 interest that was accrued during the last accounting period and $6,000 of interest that accumulated during the current accounting period but has not yet been accrued on the books.The journal entry for the interest payment should:


A) debit Interest Expense for $18,000 and credit Cash for $18,000.
B) debit Cash for $18,000 and credit Interest Payable for $18,000.
C) debit Interest Expense for $6,000,debit Interest Payable $12,000 and credit Cash for $18,000.
D) debit Interest Payable for $12,000,debit Accrued Interest $6,000 and credit Cash for $18,000.

E) All of the above
F) B) and C)

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On January 1,Melrose Manufacturing issues a 5-year bond with a face value of $15,000 and a stated interest rate of 7%.The market interest rate is 5%.The issue price of the bond was $16,299.Using the effective-interest method of amortization and rounding to the nearest dollar,the interest expense for the first year ended December 31 would be:


A) $750.
B) $814.95.
C) $1,050.
D) $1,140.93.

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

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Sierra Blanca Co.is required to match $82,620 for its portion of FICA and $8,460 for federal and state unemployment taxes.The entry to record Sierra Blanca's payroll taxes includes:


A) debit to Payroll Tax Expense for $91,080.
B) credit to Payroll Tax Expense for $91,080.
C) debit to FICA Payable for $82,620.
D) debit to Unemployment Tax Payable of $8,460.

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

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Which of the following statements about the issuance of bonds at a premium is not correct?


A) The Premium on Bonds Payable account is amortized each year and reduces the company's annual Interest Expense.
B) On the date of issuance,the stated interest rate was greater than the market interest rate.
C) As the current date approaches the maturity date,the carrying value of the bond approaches the face value of the bond.
D) The account used to record the premium has a normal debit balance.

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

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On September 1,2019,Rowen Manufacturing issued a $90,000,6-month,9% note payable to purchase equipment.At December 31,2019,the company records an adjusting entry to accrue interest incurred by not paid.The company pays the note with interest at the maturity date. What is the adjusting journal entry at December 31 to record the accrued interest on the note payable?


A) Debit Interest Expense and credit Interest Payable for $2,700.
B) Debit Interest Expense and credit Interest Payable for $3,600.
C) Debit Interest Expense and credit Interest Payable for $8,100.
D) Debit Interest Payable and credit Cash for $3,600.

E) All of the above
F) A) and C)

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Travis County Bank agrees to lend Brickyard Corporation $200,000 on January 1.Brickyard signs a $200,000,4%,9-month note.Interest is due at maturity on September 30.The company's fiscal year ends June 30 and adjusting entries are recorded at that time only. What adjusting entry should Brickyard make on June 30 before preparing its annual financial statements?


A) Debit Interest Expense and credit Interest Payable for $4,000.
B) Debit Cash and credit Interest Payable for $4,000.
C) Debit Cash and credit Interest Expense for $4,000.
D) Debit Interest Payable and credit Interest Expense for $4,000.

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

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When the times interest earned ratio decreases,the likelihood of default on liabilities increases.

A) True
B) False

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Employer payroll taxes:


A) represent the federal taxes withheld from the employees' paychecks.
B) are the amounts paid by the employee.
C) are an added payroll expense beyond the wages and salaries earned by employees.
D) represent the FICA taxes withheld from employees' paychecks.

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

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Which of the following statements about payroll is correct?


A) Payroll deductions are an expense of the company.
B) When recording the payroll,Salaries and Wages Expense equals the sum of all the deductions.
C) The net pay is debited to Salaries and Wages Expense when the payroll is recorded.
D) Gross earnings are computed by multiplying the time worked by the pay rate promised by the employer.

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

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