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Exam 7: Accounting for Liabilities

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Question 61

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Victor Company issued bonds with a $250,000 face value and a 6% stated rate of interest on January 1, Year 1. The bonds carried a 5-year term and sold for 95. Victor uses the straight-line method of amortization. Interest is payable on December 31 of each year.The carrying value of the bond liability on the December 31, Year 3 balance sheet was:

A) $241,000.
B) $242,500.
C) $237,500.
D) $245,000.

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Question 62

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Contingent liabilities are only recognized if they arise from past events.

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Question 63

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Explain the difference between the straight-line and the effective interest method of amortization of bond premiums and discounts.

Jacobs Company issued bonds with $172,000 face value on January 1, Year 1. The bonds were issued at 105 and carried a 5-year term to maturity. They had a 7% stated rate of interest that was payable in cash on December 31st of each year. Jacobs uses the straight-line method of amortization. Based on this information alone, the recognition of interest expense on December 31, Year 1 would act to:

Vogle Company purchased $8,000 of equipment by making a $500 down payment and issuing a note for the remainder. As a result of this event, assets increased by $8,000.

If a company uses the effective interest method of amortizing a bond premium, the carrying value of the bond will:

Indicate how each event affects the horizontal financial statements model. Use the following letters to record your answer in the box shown below. If an event increases one account and decreases another account equally within the same element, record I/D. If an event has no impact on the element, record NA. You do not need to enter amounts.Increase = I Decrease = D Not Affected = NAOn January 1, Year 1, Eagle Company issued $100,000 of bonds payable at the face value. When the bonds matured on December 31, Year 6, Eagle used cash to repay the bond principal and the interest for one year, which had not been previously accrued. Indicate the effects of the December 31, Year 6 payment.

Indicate how each event affects the horizontal financial statements model. Use the following letters to record your answer in the box shown below. If an event increases one account and decreases another account equally within the same element, record I/D. If an event has no impact on the element, record NA. You do not need to enter amounts.Increase = I Decrease = D Not Affected = NAOn December 31, Year 1, Tiller Company paid cash for interest on bonds it had issued on January 1, Year 1 at 98, and amortized part of the discount on bonds. Tiller Company uses the effective interest method of amortizing bond discounts. Indicate the effects of the amortization of the discount only.

Bruce Company experienced an accounting event that that increased interest expense, decreased the discount on bonds payable, and decreased cash. Which of the following choices accurately reflects how this event would affect Bruce's financial statements?

If a company has issued bonds at a premium, the amount of interest expense reported on the income statement each year will be greater than the amount of cash paid to bondholders for interest.

Indicate how each event affects the horizontal financial statements model. Use the following letters to record your answer in the box shown below. If an event increases one account and decreases another account equally within the same element, record I/D. If an event has no impact on the element, record NA. You do not need to enter amounts.Increase = I Decrease = D Not Affected = NAPing Company made its remittance to the state sales tax authority.

Which financial statements are affected by the transaction that includes the payment of bond interest and the related amortization of a discount? Describe how each statement is affected.

Which of the following represents the impact of a taxable cash sale of $1,250 on the accounting equation if the sales tax rate is 4%?

The Platte Corporation issues a 5-year note payable on January 1, Year 1 for $5,000. The interest rate is 5% and the annual payment of $1,156, due each December 31, includes both interest and principal.Which of the following correctly shows the effects of the December 31, Year 2 payment (rounded to the nearest whole dollar) ?

On January 1, Year 1, the Niagara Corporation arranges a $6,000 line of credit with the Centennial Bank. It accepted the bank's offer of 1% above the prime rate with interest payments on December 31 of each year. All borrowings and repayments are to take place on January 1 of each year.Niagara begins its loan transactions with Centennial Bank by borrowing $2,000 on January 1, Year. Which of the following answers shows the effect of this event on the financial statements?

Under what conditions is a pending lawsuit recognized in a company's financial statements? Under what conditions is a pending lawsuit disclosed in the notes to the financial statements?

Riley Company borrowed $32,000 on April 1, Year 1 from the Titan Bank. The note issued by Riley carried a one year term and a 8% annual interest rate. Riley earned cash revenue of $980 in Year 1 and $1,300 in Year 2. Assume no other transactions.The amount of net income on the Year 2 income statement would be:

If bonds with a face value of $200,000 are issued at 98, the amount of cash received from issuing the bonds is $204,082.

Riley Company borrowed $36,000 on April 1, Year 1 from the Titan Bank. The note issued by Riley carried a one year term and a 7% annual interest rate. Riley earned cash revenue of $1,700 in Year 1 and $1,400 in Year 2. Assume no other transactions.The amount of total liabilities that would appear on Riley's December 31 balance sheets for Year 1 and Year 2, respectively, would be:

Hanover Corporation issued $300,000 in bonds payable on January 1, Year 1 when the market rate of interest at the time was 7%. Assume that the 10-year bonds were issued at 103.5, and the annual interest payment was $22,495. (Round your answers to the nearest dollar.) Required:What was the amount of premium on the bonds when they were issued?Hanover Corporation uses the effective interest method to amortize premium or discount on bonds payable. What was the amount of interest expense for Year 1? What was the amount of premium amortization for Year 1?What was the carrying value of the bond liability on January 1, Year 2? What was the amount of interest expense for Year 2?