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When the amount of a contingent liability can be reasonably estimated and its likelihood is probable,the company should:


A) include a description in the notes to the financial statements.
B) record the estimated amount of the liability times the probability of its occurrence.
C) record the estimated amount of the liability on the balance sheet.
D) exclude the information about the contingent liability from its financial statements and notes.

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

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On January 1,2016,a company issues 3-year bonds with a face value of $50,000 and a stated interest rate of 7%.Because the market interest rate is 9%,the company receives $47,469 for the bond. Required: Fill in the table assuming the company uses effective-interest bond amortization. On January 1,2016,a company issues 3-year bonds with a face value of $50,000 and a stated interest rate of 7%.Because the market interest rate is 9%,the company receives $47,469 for the bond. Required: Fill in the table assuming the company uses effective-interest bond amortization.

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Which of the following statements is not correct?


A) An "A" rating is the best credit rating a company can earn.
B) Credit ratings below BB are called "junk."
C) A credit rating agency indicates a company's ability to pay its debts on a timely basis.
D) Standard and Poor's, Fitch, and Moody's are the names of credit rating agencies.

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

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In 2005,ABC Company issued $100,000 of 20-year bonds at face value.Ten years later,in 2015,the company retired the bonds early by purchasing them in the open market at $101,000.The entry to record this transaction includes a:


A) credit to Gain on Bond Retirement of $1,000.
B) debit to Loss on Bond Retirement of $1,000.
C) debit to Bonds Payable of $101,000.
D) credit to Cash of $100,000.

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

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On January 1,your company issues a 5-year bond with a face value of $10,000 and a stated interest rate of 7%.The market interest rate is 5%.The issue price of the bond was $10,866.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) $700.
B) $543.
C) $667.
D) $759.

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

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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. -Use the information above to answer the following question.What journal entry will Brickyard make when paying the interest at maturity?


A) Debit Notes Payable and credit Cash for $206,000
B) Debit Interest Expense for $4,000, and credit Cash for $4,000
C) Debit Interest Expense for $6,000 and Cash for $206,000
D) Debit Interest Payable for $4,000, credit Interest Expense for $2,000, and credit Cash for $6,000

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

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The issuance price of a bond does not depend on the:


A) face value of the bond.
B) market rate of interest.
C) perceived risk associated with the bond.
D) method used to amortize the discount or premium.

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

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A bond's issue price is the amount of money that a lender pays (and the company receives) when a bond is:


A) repaid.
B) in default.
C) issued.
D) sold from one investor to another investor.

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

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The issue price of each $1,000 bond that pays interest at 5% and has a bond price of 92.10 equals:


A) $921.
B) $1,050.
C) $950.
D) $1,000.

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

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Your company is planning to issue $1,000 bonds with a stated interest rate of 7% and a maturity date of July 15,2022.If interest rates fall in the economy so that similar financial investments pay 5%,your company will:


A) not be able to issue the bonds because no one will buy them.
B) receive a higher issue price as buyers compete for the bonds.
C) have to accept a lower issue price to attract buyers.
D) have to reprint the bond certificates to change stated interest rate to 5%.

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

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The journal entry to record employer payroll taxes affects:


A) assets only.
B) liabilities only.
C) liabilities and stockholders' equity.
D) assets and liabilities.

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

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On October 1,2015,Attra Inc.borrows $200,000 on a three-year note that requires the company to pay 6% interest on March 31 and September 30.On December 31,2015,the adjusting entry to accrue interest on the note should debit:


A) Interest Expense and credit Interest Payable for $3,000.
B) Interest Payable and credit Interest Expense for $3,000.
C) Interest Expense and credit Cash for $6,000.
D) Interest Expense and credit Interest Payable for $6,000.

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

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A company pays $9,000 in interest on notes consisting of $6,000 of interest that was accrued during the last accounting period and $3,000 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 include a:


A) debit to Interest Expense for $9,000 and a credit to Cash for $9,000.
B) debit to Cash for $9,000 and a credit to Interest Payable for $9,000.
C) debit to Interest Expense for $3,000, a debit to Interest Payable for $6,000, and a credit to Cash for $9,000.
D) debit to Interest Payable for $6,000, a debit to Accrued Interest for $3,000, and a credit to Cash for $9,000.

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

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The effective-interest method of amortization is considered a conceptually superior method of accounting for bonds.

A) True
B) False

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Which of the following items results in a contingent liability?


A) Income tax expense
B) A lawsuit filed against a company
C) Interest expense
D) Advertising expense

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

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Which of the following statements about bond premiums or discounts is correct?


A) A discount on a bond reduces the amount that the issuer has to repay to the lenders.
B) A premium on a bond increases the interest expense of the loan to the issuer.
C) A premium on a bond increases the amount that the issuer has to repay to the lenders.
D) A discount on a bond increases the interest expense of the loan to the issuer.

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

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The three key pieces of information that are stated on a bond certificate are the:


A) interest payment, the face value of the bond, and the credit rating of the company.
B) market interest rate, the price of the bond, and the maturity date.
C) stated interest rate, the face value of the bond, and the maturity date.
D) interest payment, the issue price of the bond, and the credit rating of the company.

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

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The entry to record a bond retirement at maturity usually involves no gain or loss.

A) True
B) False

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On December 31,2015,a company had assets of $16 billion and stockholders' equity of $8 billion.That same company had assets of $20 billion and stockholders' equity of $9 billion as of December 31,2016.During 2016,the company reported total sales revenue of $9 billion and total expenses of $7 billion.What is the company's debt-to-assets ratio on December 31,2016?


A) 0.55
B) 0.45
C) 0.035
D) 0.01

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

Correct Answer

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On October 1,2015,United Co.negotiates with its bank to borrow $10,000 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 30,2016,the maturity date.What journal entry needs to be recorded as of March 31,2016?


A) Debit Interest Payable $125, debit Interest Expense $125, and credit Cash $250
B) Debit Interest Expense $250 and credit Cash $250
C) Debit Interest Expense $250 and credit Interest Payable for $250
D) Debit Interest Expense $125 and credit Cash for $125

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

Correct Answer

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