Professional Documents
Culture Documents
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MULTIPLE CHOICE—Computational
63. Edson Corp. signed a three-month, zero-interest-bearing note on November 1, 2007 for
the purchase of $150,000 of inventory. The face value of the note was $152,205.
Assuming Edson used a ―Discount on Note Payable‖ account to initially record the note
and that the discount will be amortized equally over the 3-month period, the adjusting
entry made at December 31, 2007 will include a
a. debit to Discount on Note Payable for $735.
b. debit to Interest Expense for $1,470.
c. credit to Discount on Note Payable for $735.
d. credit to Interest Expense for $1,470.
66. On December 31, 2006, Frye Co. has $2,000,000 of short-term notes payable due on
February 14, 2007. On January 10, 2007, Frye arranged a line of credit with County
Bank which allows Frye to borrow up to $1,500,000 at one percent above the prime rate
for three years. On February 2, 2007, Frye borrowed $1,200,000 from County Bank and
used $500,000 additional cash to liquidate $1,700,000 of the short-term notes payable.
The amount of the short-term notes payable that should be reported as current liabilities
on the December 31, 2006 balance sheet which is issued on March 5, 2007 is
a. $0.
b. $300,000.
c. $500,000.
d. $800,000.
Use the following information for questions 67 and 68.
Raney Co. is a retail store operating in a state with a 6% retail sales tax. The retailer may keep
2% of the sales tax collected. Raney Co. records the sales tax in the Sales account. The
amount recorded in the Sales account during May was $148,400
67. The amount of sales taxes (to the nearest dollar) for May is
a. $8,726.
b. $8,400.
c. $8,904.
d. $9,438.
68. The amount of sales taxes payable (to the nearest dollar) to the state for the month of
May is
a. $8,551.
b. $8,232.
c. $8,726.
d. $9,249.
69.Trent, Inc., is a retail store operating in a state with a 5% retail sales tax. The state law
provides that the retail sales tax collected during the month must be remitted to the state during
the following month. If the amount collected is remitted to the state on or before the twentieth of
the following month, the retailer may keep 3% of the sales tax collected. On April 10, 2007,
Trent remitted $81,480 tax to the state tax division for March 2007 retail sales. What was Trent
's March 2007 retail sales subject to sales tax?
a. $1,629,600.
b. $1,596,000.
c. $1,680,000.
d. $1,645,000.
70. Holbert Corporation has $2,500,000 of short-term debt it expects to retire with proceeds
from the sale of 75,000 shares of common stock. If the stock is sold for $20 per share
subsequent to the balance sheet date, but before the balance sheet is issued, what
amount of short-term debt could be excluded from current liabilities?
a. $1,500,000
b. $2,500,000
c. $1,000,000
d. $0
71. Grogan Corporation has $1,800,000 of short-term debt it expects to retire with proceeds
from the sale of 60,000 shares of common stock. If the stock is sold for $20 per share
subsequent to the balance sheet date, but before the balance sheet is issued, what
amount of short-term debt could be excluded from current liabilities?
a. $1,200,000
b. $1,800,000
c. $600,000
d. $0
72. Timmons Co., which has a taxable payroll of $500,000, is subject to FUTA tax of 6.2%
and a state contribution rate of 5.4%. However, because of stable employment
experience, the company’s state rate has been reduced to 2%. What is the total amount
of federal and state unemployment tax for Timmons Co.?
a. $58,500
b. $41,000
c. $20,000
d. $14,000
73. Unruh Co., which has a taxable payroll of $400,000, is subject to FUTA tax of 6.2% and
a state contribution rate of 5.4%. However, because of stable employment experience,
the company’s state rate has been reduced to 2%. What is the total amount of federal
and state unemployment tax for Unruh Co.?
a. $46,800
b. $32,800
c. $16,000
d. $11,200
74. A company gives each of its 50 employees (assume they were all employed
continuously through 2007 and 2008) 12 days of vacation a year if they are employed at
the end of the year. The vacation accumulates and may be taken starting January 1 of
the next year. The employees work 8 hours per day. In 2007, they made $14 per hour
and in 2008 they made $16 per hour. During 2008, they took an average of 9 days of
vacation each. The company’s policy is to record the liability existing at the end of each
year at the wage rate for that year. What amount of vacation liability would be reflected
on the 2007 and 2008 balance sheets, respectively?
a. $67,200; $93,600
b. $76,800; $96,000
c. $67,200; $96,000
d. $76,800; $93,600
75. A company gives each of its 50 employees (assume they were all employed
continuously through 2007 and 2008) 12 days of vacation a year if they are employed at
the end of the year. The vacation accumulates and may be taken starting January 1 of
the next year. The employees work 8 hours per day. In 2007, they made $17.50 per
hour and in 2008 they made $20 per hour. During 2008, they took an average of 9 days
of vacation each. The company’s policy is to record the liability existing at the end of
each year at the wage rate for that year. What amount of vacation liability would be
reflected on the 2007 and 2008 balance sheets, respectively?
a. $84,000; $117,000
b. $96,000; $120,000
c. $84,000; $120,000
d. $96,000; $117,000
76. The total payroll of Waters Company for the month of October, 2007 was $360,000, of
which $90,000 represented amounts paid in excess of $90,000 to certain employees.
$300,000 represented amounts paid to employees in excess of the $7,000 maximum
subject to unemployment taxes. $90,000 of federal income taxes and $9,000 of union
dues were withheld. The state unemployment tax is 1%, the federal unemployment tax is
.8%, and the current F.I.C.A. tax is 7.65% on an employee’s wages to $90,000 and
1.45% in excess of $90,000. What amount should Waters record as payroll tax
expense?
a. $118,620.
b. $113,040.
c. $23,040.
d. $28,440.
Simson has chosen to accrue the liability for compensated absences at the current rates of pay
in effect when the compensated time is earned.
77. What is the amount of expense relative to compensated absences that should be
reported on Simson’s income statement for 2006?
a. $0.
b. $68,880.
c. $75,600.
d. $72,240.
78. What is the amount of the accrued liability for compensated absences that should be
reported at December 31, 2008?
a. $94,920.
b. $90,720.
c. $79,800.
d. $95,760.
79. A company offers a cash rebate of $1 on each $4 package of light bulbs sold during
2007. Historically, 10% of customers mail in the rebate form. During 2007, 4,000,000
packages of light bulbs are sold, and 140,000 $1 rebates are mailed to customers. What
is the rebate expense and liability, respectively, shown on the 2007 financial statements
dated December 31?
a. $400,000; $400,000
b. $400,000; $260,000
c. $260,000; $260,000
d. $140,000; $260,000
80. A company buys an oil rig for $1,000,000 on January 1, 2007. The life of the rig is 10
years and the expected cost to dismantle the rig at the end of 10 years is $200,000
(present value at 10% is $77,110). 10% is an appropriate interest rate for this company.
What expense should be recorded for 2007 as a result of these events?
a. Depreciation expense of $120,000
b. Depreciation expense of $100,000 and interest expense of $7,711
c. Depreciation expense of $100,000 and interest expense of $20,000
d. Depreciation expense of $107,710 and interest expense of $7,711
81. Wellman Company self insures its property for fire and storm damage. If the company
were to obtain insurance on the property, it would cost them $1,000,000 per year. The
company estimates that on average it will incur losses of $800,000 per year. During
2007, $350,000 worth of losses were sustained. How much total expense and/or loss
should be recognized by Wellman Company for 2007?
a. $350,000 in losses and no insurance expense
b. $350,000 in losses and $450,000 in insurance expense
c. $0 in losses and $800,000 in insurance expense
d. $0 in losses and $1,000,000 in insurance expense
82. A company offers a cash rebate of $1 on each $4 package of batteries sold during 2007.
Historically, 10% of customers mail in the rebate form. During 2007, 6,000,000
packages of batteries are sold, and 210,000 $1 rebates are mailed to customers. What
is the rebate expense and liability, respectively, shown on the 2007 financial statements
dated December 31?
a. $600,000; $600,000
b. $600,000; $390,000
c. $390,000; $390,000
d. $210,000; $390,000
83. A company buys an oil rig for $2,000,000 on January 1, 2007. The life of the rig is 10
years and the expected cost to dismantle the rig at the end of 10 years is $400,000
(present value at 10% is $154,220). 10% is an appropriate interest rate for this
company. What expense should be recorded for 2007 as a result of these events?
a. Depreciation expense of $240,000
b. Depreciation expense of $200,000 and interest expense of $15,422
c. Depreciation expense of $200,000 and interest expense of $40,000
d. Depreciation expense of $215,420 and interest expense of $15,422
84. During 2006, Younger Co. introduced a new line of machines that carry a three-year
warranty against manufacturer’s defects. Based on industry experience, warranty costs
are estimated at 2% of sales in the year of sale, 4% in the year after sale, and 6% in the
second year after sale. Sales and actual warranty expenditures for the first three-year
period were as follows:
Sales Actual Warranty Expenditures
2006 $ 600,000 $ 9,000
2007 1,500,000 45,000
2008 2,100,000 135,000
$4,200,000 $189,000
What amount should Younger report as a liability at December 31, 2008?
a. $0
b. $15,000
c. $204,000
d. $315,000
85. Milner Frosted Flakes Company offers its customers a pottery cereal bowl if they send in
3 boxtops from Milner Frosted Flakes boxes and $1.00. The company estimates that
60% of the boxtops will be redeemed. In 2007, the company sold 675,000 boxes of
Frosted Flakes and customers redeemed 330,000 boxtops receiving 110,000 bowls. If
the bowls cost Milner Company $2.50 each, how much liability for outstanding premiums
should be recorded at the end of 2007?
a. $25,000
b. $37,500
c. $62,500
d. $87,500
86. During 2006, Venable Co. introduced a new line of machines that carry a three-year
warranty against manufacturer’s defects. Based on industry experience, warranty costs
are estimated at 2% of sales in the year of sale, 4% in the year after sale, and 6% in the
second year after sale. Sales and actual warranty expenditures for the first three-year
period were as follows:
Sales Actual Warranty Expenditures
2006 $ 400,000 $ 6,000
2007 1,000,000 30,000
2008 1,400,000 90,000
$2,800,000 $126,000
What amount should Venable report as a liability at December 31, 2008?
a. $0
b. $10,000
c. $136,000
d. $210,000
87. Pryor Frosted Flakes Company offers its customers a pottery cereal bowl if they send in
4 boxtops from Pryor Frosted Flakes boxes and $1.00. The company estimates that 60%
of the boxtops will be redeemed. In 2007, the company sold 500,000 boxes of Frosted
Flakes and customers redeemed 220,000 boxtops receiving 55,000 bowls. If the bowls
cost Pryor Company $2.50 each, how much liability for outstanding premiums should be
recorded at the end of 2007?
a. $20,000
b. $30,000
c. $50,000
d. $70,000
Use the following information for questions 88, 89, and 90.
Kent Co. includes one coupon in each bag of dog food it sells. In return for eight coupons,
customers receive a leash. The leashes cost Kent $2.00 each. Kent estimates that 40 percent of
the coupons will be redeemed. Data for 2006 and 2007 are as follows:
2006 2007
Bags of dog food sold 500,000 600,000
Leashes purchased 18,000 22,000
Coupons redeemed 120,000 150,000
91. Vernon Co. is being sued for illness caused to local residents as a result of negligence
on the company's part in permitting the local residents to be exposed to highly toxic
chemicals from its plant. Vernon's lawyer states that it is probable that Vernon will lose
the suit and be found liable for a judgment costing Vernon anywhere from $1,200,000 to
$6,000,000. However, the lawyer states that the most probable cost is $3,600,000. As a
result of the above facts, Vernon should accrue
a. a loss contingency of $1,200,000 and disclose an additional contingency of up to
$4,800,000.
b. a loss contingency of $3,600,000 and disclose an additional contingency of up to
$2,400,000.
c. a loss contingency of $3,600,000 but not disclose any additional contingency.
d. no loss contingency but disclose a contingency of $1,200,000 to $6,000,000.
92. Moore Company estimates its annual warranty expense as 4% of annual net sales. The
following data relate to the calendar year 2007:
Net sales $1,500,000
Warranty liability account
Balance, Dec. 31, 2007 $10,000 debit before adjustment
Balance, Dec. 31, 2007 50,000 credit after adjustment
Which one of the following entries was made to record the 2007 estimated warranty
expense?
a. Warranty Expense ................................................................ 60,000
Retained Earnings (prior-period adjustment) ............. 10,000
Warranty Liability ........................................................ 50,000
b. Warranty Expense ................................................................ 50,000
Retained Earnings (prior-period adjustment) ....................... 10,000
Warranty Liability ........................................................ 60,000
c. Warranty Expense ................................................................ 40,000
Warranty Liability ........................................................ 40,000
d. Warranty Expense ................................................................ 60,000
Warranty Liability ........................................................ 60,000
93. In 2006, Slimon Corporation began selling a new line of products that carry a two-year
warranty against defects. Based upon past experience with other products, the
estimated warranty costs related to dollar sales are as follows:
First year of warranty 2%
Second year of warranty 5%
Sales and actual warranty expenditures for 2006 and 2007 are presented below:
2006 2007
Sales $300,000 $400,000
Actual warranty expenditures 10,000 20,000
What is the estimated warranty liability at the end of 2007?
a. $19,000.
b. $29,000.
c. $49,000.
d. $8,000.
94. On January 3, 2007, Alton Corp. owned a machine that had cost $200,000. The
accumulated depreciation was $120,000, estimated salvage value was $12,000, and fair
market value was $320,000. On January 4, 2007, this machine was irreparably damaged
by Reed Corp. and became worthless. In October 2007, a court awarded damages of
$320,000 against Reed in favor of Alton. At December 31, 2007, the final outcome of this
case was awaiting appeal and was, therefore, uncertain. However, in the opinion of
Alton’s attorney, Reed’s appeal will be denied. At December 31, 2007, what amount
should Alton accrue for this gain contingency?
a. $320,000.
b. $260,000.
c. $200,000.
d. $0.
95. Horton Food Company distributes to consumers coupons which may be presented (on
or before a stated expiration date) to grocers for discounts on certain products of Horton.
The grocers are reimbursed when they send the coupons to Horton. In Horton's
experience, 50% of such coupons are redeemed, and generally one month elapses
between the date a grocer receives a coupon from a consumer and the date Horton
receives it. During 2007 Horton issued two separate series of coupons as follows:
Consumer Amount Disbursed
Issued On Total Value Expiration Date as of 12/31/07
1/1/07 $375,000 6/30/07 $177,000
7/1/07 540,000 12/31/07 225,000
The only journal entries to date recorded debits to coupon expense and credits to cash
of $536,000. The December 31, 2007 balance sheet should include a liability for
unredeemed coupons of
a. $0.
b. $45,000.
c. $93,000.
d. $270,000.
*97. In 2006, income before deductions for the bonus and federal income taxes was
$600,000. If the bonus is based on income before deduction of the bonus but after
deduction of income tax, the bonus (to the nearest dollar) is
a. $20,690.
b. $21,000.
c. $21,320.
d. $30,000.
*98. In 2007, income before deductions for the bonus and federal income taxes was
$800,000. If the bonus is based on income after deductions for the bonus and income
tax, the bonus (to the nearest dollar) is
a. $26,292.
b. $26,666.
c. $27,053.
d. $40,000.
*99. Farr Products Corp. provides an incentive compensation plan under which its president
receives a bonus equal to 20% of the corporation's income in excess of $300,000 before
income tax but after the bonus. If income before tax and bonus is $1,200,000 and the
effective tax rate is 30%, the amount of the bonus would be
a. $126,000.
b. $150,000.
c. $180,000.
d. $240,000.
100. Which of the following is generally associated with payables classified as accounts
payable?
Periodic Payment Secured
of Interest by Collateral
a. No No
b. No Yes
c. Yes No
d. Yes Yes
101. On January 1, 2007, Didde Co. leased a building to Ellis Corp. for a ten-year term at an
annual rental of $80,000. At inception of the lease, Didde received $320,000 covering
the first two years' rent of $160,000 and a security deposit of $160,000. This deposit will
not be returned to Ellis upon expiration of the lease but will be applied to payment of rent
for the last two years of the lease. What portion of the $320,000 should be shown as a
current and long-term liability, respectively, in Didde's December 31, 2007 balance
sheet?
Current Liability Long-term Liability
a. $0 $320,000
b. $80,000 $160,000
c. $160,000 $160,000
d. $160,000 $80,000
102. On September 1, 2006, Looper Co. issued a note payable to National Bank in the
amount of $1,200,000, bearing interest at 12%, and payable in three equal annual
principal payments of $400,000. On this date, the bank's prime rate was 11%. The first
payment for interest and principal was made on September 1, 2007. At December 31,
2007, Looper should record accrued interest payable of
a. $48,000.
b. $44,000.
c. $32,000.
d. $29,334.
103. Included in Sauder Corp.'s liability account balances at December 31, 2006, were the
following:
7% note payable issued October 1, 2006, maturing September 30, 2007 $250,000
8% note payable issued April 1, 2006, payable in six equal annual
installments of $150,000 beginning April 1, 2007 600,000
Sauder 's December 31, 2006 financial statements were issued on March 31, 2007. On
January 15, 2007, the entire $600,000 balance of the 8% note was refinanced by
issuance of a long-term obligation payable in a lump sum. In addition, on March 10,
2007, Sauder consummated a noncancelable agreement with the lender to refinance the
7%, $250,000 note on a long-term basis, on readily determinable terms that have not yet
been implemented. On the December 31, 2006 balance sheet, the amount of the notes
payable that Sauder should classify as short-term obligations is
a. $175,000.
b. $125,000.
c. $50,000.
d. $0.
104. Barr Company’s salaried employees are paid biweekly. Occasionally, advances made to
employees are paid back by payroll deductions. Information relating to salaries for the
calendar year 2007 is as follows:
12/31/06 12/31/07
Employee advances $12,000 $ 18,000
Accrued salaries payable 65,000 ?
Salaries expense during the year 650,000
Salaries paid during the year (gross) 625,000
At December 31, 2007, what amount should Barr report for accrued salaries payable?
a. $90,000.
b. $84,000.
c. $72,000.
d. $25,000.
105. Quirk Corp.'s payroll for the pay period ended October 31, 2007 is summarized as follows:
Federal Amount of Wages Subject
Department Total Income Tax to Payroll Taxes
Payroll Wages Withheld F.I.C.A. Unemployment
Factory $ 75,000 $ 9,000 $70,000 $22,000
Sales 22,000 3,000 16,000 2,000
Office 18,000 2,000 8,000 —
$115,000 $14,000 $94,000 $24,000
Assume the following payroll tax rates:
F.I.C.A. for employer and employee 7% each
Unemployment 3%
What amount should Quirk accrue as its share of payroll taxes in its October 31, 2007
balance sheet?
a. $21,300.
b. $14,720.
c. $13,880.
d. $7,300.
106. Dexter Co. sells major household appliance service contracts for cash. The service
contracts are for a one-year, two-year, or three-year period. Cash receipts from
contracts are credited to unearned service contract revenues. This account had a
balance of $480,000 at December 31, 2006 before year-end adjustment. Service
contract costs are charged as incurred to the service contract expense account, which
had a balance of $120,000 at December 31, 2006. Outstanding service contracts at
December 31, 2006 expire as follows:
During 2007 During 2008 During 2009
$100,000 $160,000 $70,000
What amount should be reported as unearned service contract revenues in Dexter's
December 31, 2006 balance sheet?
a. $360,000.
b. $330,000.
c. $240,000.
d. $220,000.
107. Utley Trading Stamp Co. records stamp service revenue and provides for the cost of
redemptions in the year stamps are sold to licensees. Utley's past experience indicates
that only 80% of the stamps sold to licensees will be redeemed. Utley's liability for stamp
redemptions was $7,500,000 at December 31, 2005. Additional information for 2006 is
as follows:
Stamp service revenue from stamps sold to licensees $5,000,000
Cost of redemptions 3,400,000
If all the stamps sold in 2006 were presented for redemption in 2007, the redemption cost
would be $2,500,000. What amount should Utley report as a liability for stamp
redemptions at December 31, 2006?
a. $9,100,000.
b. $6,600,000.
c. $6,100,000.
d. $4,100,000.
108. Lett Co. has a probable loss that can only be reasonably estimated within a range of
outcomes. No single amount within the range is a better estimate than any other
amount. The loss accrual should be
a. zero.
b. the maximum of the range.
c. the mean of the range.
d. the minimum of the range.
109. During 2006, Blass Co. introduced a new product carrying a two-year warranty against
defects. The estimated warranty costs related to dollar sales are 2% within 12 months
following sale and 4% in the second 12 months following sale. Sales and actual warranty
expenditures for the years ended December 31, 2006 and 2007 are as follows:
Actual Warranty
Sales Expenditures
2006 $ 800,000 $12,000
2007 1,000,000 30,000
$1,800,000 $42,000
At December 31, 2007, Blass should report an estimated warranty liability of
a. $0.
b. $10,000.
c. $30,000.
d. $66,000.
110. In March 2007, an explosion occurred at Howe Co.'s plant, causing damage to area
properties. By May 2007, no claims had yet been asserted against Howe. However,
Howe's management and legal counsel concluded that it was reasonably possible that
Howe would be held responsible for negligence, and that $4,000,000 would be a
reasonable estimate of the damages. Howe's $5,000,000 comprehensive public liability
policy contains a $400,000 deductible clause. In Howe's December 31, 2006 financial
statements, for which the auditor's fieldwork was completed in April 2007, how should
this casualty be reported?
a. As a note disclosing a possible liability of $4,000,000.
b. As an accrued liability of $400,000.
c. As a note disclosing a possible liability of $400,000.
d. No note disclosure of accrual is required for 2006 because the event occurred in
2007.
65. b $1,500,000.
81. a
4
102. c $800,000 × .12 × — = $32,000.
12
108. d Conceptual.
110. c Conceptual.
CHAPTER 14
LONG-TERM LIABILITIES
MULTIPLE CHOICE—Computational
63. Limeway Company issues $5,000,000, 6%, 5-year bonds dated January 1, 2007 on
January 1, 2007. The bonds pay interest semiannually on June 30 and December 31.
The bonds are issued to yield 5%. What are the proceeds from the bond issue?
2.5% 3.0% 5.0% 6.0%
Present value of a single sum for 5 periods .88385 .86261 .78353 .74726
Present value of a single sum for 10 periods .78120 .74409 .61391 .55839
Present value of an annuity for 5 periods 4.64583 4.57971 4.32948 4.21236
Present value of an annuity for 10 periods 8.75206 8.53020 7.72173 7.36009
a. $5,000,000
b. $5,216,494
c. $5,218,809
d. $5,217,308
65. Houghton Company issues $10,000,000, 6%, 5-year bonds dated January 1, 2007 on
January 1, 2007. The bonds pays interest semiannually on June 30 and December 31.
The bonds are issued to yield 5%. What are the proceeds from the bond issue?
2.5% 3.0% 5.0% 6.0%
Present value of a single sum for 5 periods .88385 .86261 .78353 .74726
Present value of a single sum for 10 periods .78120 .74409 .61391 .55839
Present value of an annuity for 5 periods 4.64583 4.57971 4.32948 4.21236
Present value of an annuity for 10 periods 8.75206 8.53020 7.72173 7.36009
a. $10,000,000
b. $10,432,988
c. $10,437,618
d. $10,434,616
66. Benton Company issues $10,000,000 of 10-year, 9% bonds on March 1, 2007 at 97 plus
accrued interest. The bonds are dated January 1, 2007, and pay interest on June 30 and
December 31. What is the total cash received on the issue date?
a. $9,700,000
b. $10,225,000
c. $9,850,000
d. $9,550,000
67. A company issues $20,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2007.
Interest is paid on June 30 and December 31. The proceeds from the bonds are
$19,604,145. Using effective-interest amortization, how much interest expense will be
recognized in 2007?
a. $780,000
b. $1,560,000
c. $1,568,498
d. $1,568,332
68. A company issues $20,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2007.
Interest is paid on June 30 and December 31. The proceeds from the bonds are
$19,604,145. Using effective-interest amortization, what will the carrying value of the
bonds be on the December 31, 2007 balance sheet?
a. $19,612,643
b. $20,000,000
c. $19,625,125
d. $19,608,310
69. A company issues $20,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2006.
Interest is paid on June 30 and December 31. The proceeds from the bonds are
$19,604,145. Using straight-line amortization, what is the carrying value of the bonds on
December 31, 2008?
a. $19,670,231
b. $19,940,622
c. $19,633,834
d. $19,663,523
70. A company issues $20,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2006.
Interest is paid on June 30 and December 31. The proceeds from the bonds are
$19,604,145. What is interest expense for 2007, using straight-line amortization?
a. $1,540,207
b. $1,560,000
c. $1,569,192
d. $1,579,793
71. A company issues $5,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2007.
Interest is paid on June 30 and December 31. The proceeds from the bonds are
$4,901,036. Using effective-interest amortization, how much interest expense will be
recognized in 2007?
a. $195,000
b. $390,000
c. $392,124
d. $392,083
72. A company issues $5,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2007.
Interest is paid on June 30 and December 31. The proceeds from the bonds are
$4,901,036. Using effective-interest amortization, what will the carrying value of the
bonds be on the December 31, 2007 balance sheet?
a. $4,903,160
b. $5,000,000
c. $4,906,281
d. $4,902,077
73. A company issues $5,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2006.
Interest is paid on June 30 and December 31. The proceeds from the bonds are
$4,901,036. Using straight-line amortization, what is the carrying value of the bonds on
December 31, 2008?
a. $4,917,558
b. $4,985,156
c. $4,908,458
d. $4,915,881
74. A company issues $5,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2006.
Interest is paid on June 30 and December 31. The proceeds from the bonds are
$4,901,036. What is interest expense for 2007, using straight-line amortization?
a. $385,052
b. $390,000
c. $392,298
d. $394,948
75. On January 1, 2007, Foley Co. sold 12% bonds with a face value of $600,000. The
bonds mature in five years, and interest is paid semiannually on June 30 and December
31. The bonds were sold for $646,200 to yield 10%. Using the effective-interest method
of amortization, interest expense for 2007 is
a. $60,000.
b. $64,436.
c. $64,620.
d. $72,000.
76. On January 2, 2007, a calendar-year corporation sold 8% bonds with a face value of
$600,000. These bonds mature in five years, and interest is paid semiannually on June
30 and December 31. The bonds were sold for $553,600 to yield 10%. Using the
effective-interest method of computing interest, how much should be charged to interest
expense in 2007?
a. $48,000.
b. $55,360.
c. $55,544.
d. $60,000.
77. The December 31, 2006, balance sheet of Eddy Corporation includes the following
items:
9% bonds payable due December 31, 2015 $1,000,000
Unamortized premium on bonds payable 27,000
The bonds were issued on December 31, 2005, at 103, with interest payable on July 1
and December 31 of each year. Eddy uses straight-line amortization. On March 1, 2007,
Eddy retired $400,000 of these bonds at 98 plus accrued interest. What should Eddy
record as a gain on retirement of these bonds? Ignore taxes.
a. $18,800.
b. $10,800.
c. $18,600.
d. $20,000.
78. On January 1, 2001, Gonzalez Corporation issued $4,500,000 of 10% ten-year bonds at
103. The bonds are callable at the option of Gonzalez at 105. Gonzalez has recorded
amortization of the bond premium on the straight-line method (which was not materially
different from the effective-interest method).
On December 31, 2007, when the fair market value of the bonds was 96, Gonzalez
repurchased $1,000,000 of the bonds in the open market at 96. Gonzalez has recorded
interest and amortization for 2007. Ignoring income taxes and assuming that the gain is
material, Gonzalez should report this reacquisition as
a. a loss of $49,000.
b. a gain of $49,000.
c. a loss of $61,000.
d. a gain of $61,000.
79. The 10% bonds payable of Klein Company had a net carrying amount of $570,000 on
December 31, 2006. The bonds, which had a face value of $600,000, were issued at a
discount to yield 12%. The amortization of the bond discount was recorded under the
effective-interest method. Interest was paid on January 1 and July 1 of each year. On
July 2, 2007, several years before their maturity, Klein retired the bonds at 102. The
interest payment on July 1, 2007 was made as scheduled. What is the loss that Klein
should record on the early retirement of the bonds on July 2, 2007? Ignore taxes.
a. $12,000.
b. $37,800.
c. $33,600.
d. $42,000.
80. A corporation called an outstanding bond obligation four years before maturity. At that
time there was an unamortized discount of $300,000. To extinguish this debt, the
company had to pay a call premium of $100,000. Ignoring income tax considerations,
how should these amounts be treated for accounting purposes?
a. Amortize $400,000 over four years.
b. Charge $400,000 to a loss in the year of extinguishment.
c. Charge $100,000 to a loss in the year of extinguishment and amortize $300,000 over
four years.
d. Either amortize $400,000 over four years or charge $400,000 to a loss immediately,
whichever management selects.
81. The 12% bonds payable of Keane Co. had a carrying amount of $832,000 on December
31, 2006. The bonds, which had a face value of $800,000, were issued at a premium to
yield 10%. Keane uses the effective-interest method of amortization. Interest is paid on
June 30 and December 31. On June 30, 2007, several years before their maturity, Keane
retired the bonds at 104 plus accrued interest. The loss on retirement, ignoring taxes, is
a. $0.
b. $6,400.
c. $9,920.
d. $32,000.
82. Axlon Company issues $10,000,000 face value of bonds at 96 on January 1, 2006. The
bonds are dated January 1, 2006, pay interest semiannually at 8% on June 30 and
December 31, and mature in 10 years. Straight-line amortization is used for discounts
and premiums. On September 1, 2009, $6,000,000 of the bonds are called at 102 plus
accrued interest. What gain or loss would be recognized on the called bonds on
September 1, 2009?
a. $600,000 loss
b. $272,000 loss
c. $360,000 loss
d. $453,333 loss
83. Goebel Company issues $5,000,000 face value of bonds at 96 on January 1, 2006. The
bonds are dated January 1, 2006, pay interest semiannually at 8% on June 30 and
December 31, and mature in 10 years. Straight-line amortization is used for discounts
and premiums. On September 1, 2009, $3,000,000 of the bonds are called at 102 plus
accrued interest. What gain or loss would be recognized on the called bonds on
September 1, 2009?
a. $300,000 loss
b. $136,000 loss
c. $180,000 loss
d. $226,667 loss
84. On January 1, 2007, Ann Rosen loaned $45,078 to Joe Grant. A zero-interest-bearing
note (face amount, $60,000) was exchanged solely for cash; no other rights or privileges
were exchanged. The note is to be repaid on December 31, 2009. The prevailing rate of
interest for a loan of this type is 10%. The present value of $60,000 at 10% for three
years is $45,078. What amount of interest income should Ms. Rosen recognize in 2007?
a. $4,508.
b. $6,000.
c. $18,000.
d. $13,524.
85. On January 1, 2007, Garner Company sold property to Agler Company which originally
cost Garner $760,000. There was no established exchange price for this property. Agler
gave Garner a $1,200,000 zero-interest-bearing note payable in three equal annual
installments of $400,000 with the first payment due December 31, 2007. The note has
no ready market. The prevailing rate of interest for a note of this type is 10%. The
present value of a $1,200,000 note payable in three equal annual installments of
$400,000 at a 10% rate of interest is $994,800. What is the amount of interest income
that should be recognized by Garner in 2007, using the effective-interest method?
a. $0.
b. $40,000.
c. $99,480.
d. $120,000.
86. On January 1, 2007, Glenn Company sold property to Henry Company. There was no
established exchange price for the property, and Henry gave Glenn a $2,000,000 zero-
interest-bearing note payable in 5 equal annual installments of $400,000, with the first
payment due December 31, 2007. The prevailing rate of interest for a note of this type is
9%. The present value of the note at 9% was $1,442,000 at January 1, 2007. What
should be the balance of the Discount on Notes Payable account on the books of Henry
at December 31, 2007 after adjusting entries are made, assuming that the effective-
interest method is used?
a. $0
b. $428,220
c. $446,400
d. $558,000
87. Nyland Company’s 2007 financial statements contain the following selected data:
Income taxes $40,000
Interest expense 20,000
Net income 60,000
Nyland’s times interest earned for 2007 is
a. 3 times
b. 4 times.
c. 5 times.
d. 6 times.
On December 31, 2005, Reese Co. is in financial difficulty and cannot pay a note due that day.
It is a $600,000 note with $60,000 accrued interest payable to Trear, Inc. Trear agrees to accept
from Reese equipment that has a fair value of $290,000, an original cost of $480,000, and
accumulated depreciation of $230,000. Trear also forgives the accrued interest, extends the
maturity date to December 31, 2008, reduces the face amount of the note to $250,000, and
reduces the interest rate to 6%, with interest payable at the end of each year.
*88. Reese should recognize a gain or loss on the transfer of the equipment of
a. $0.
b. $40,000 gain.
c. $60,000 gain.
d. $190,000 loss.
*89. Reese should recognize a gain on the partial settlement and restructure of the debt of
a. $0.
b. $15,000.
c. $55,000.
d. $75,000
90. Reese should record interest expense for 2008 of
a. $0.
b. $15,000.
c. $30,000.
d. $45,000.
91. On July 1, 2007, Pryce Co. issued 1,000 of its 10%, $1,000 bonds at 99 plus accrued
interest. The bonds are dated April 1, 2007 and mature on April 1, 2017. Interest is
payable semiannually on April 1 and October 1. What amount did Pryce receive from the
bond issuance?
a. $1,015,000
b. $1,000,000
c. $990,000
d. $965,000
92. On January 1, 2007, Gomez Co. issued its 10% bonds in the face amount of
$3,000,000, which mature on January 1, 2017. The bonds were issued for $3,405,000 to
yield 8%, resulting in bond premium of $405,000. Gomez uses the effective-interest
method of amortizing bond premium. Interest is payable annually on December 31. At
December 31, 2007, Gomez's adjusted unamortized bond premium should be
a. $405,000.
b. $377,400.
c. $364,500.
d. $304,500.
93. On July 1, 2005, Kitel, Inc. issued 9% bonds in the face amount of $5,000,000, which
mature on July 1, 2015. The bonds were issued for $4,695,000 to yield 10%, resulting in
a bond discount of $305,000. Kitel uses the effective-interest method of amortizing bond
discount. Interest is payable annually on June 30. At June 30, 2007, Kitel's unamortized
bond discount should be
a. $264,050.
b. $255,000.
c. $244,000.
d. $215,000.
94. On January 1, 2007, Nott Co. sold $1,000,000 of its 10% bonds for $885,296 to yield
12%. Interest is payable semiannually on January 1 and July 1. What amount should
Nott report as interest expense for the six months ended June 30, 2007?
a. $44,266
b. $50,000
c. $53,118
d. $60,000
95. On January 1, 2007, Kite Co. redeemed its 15-year bonds of $2,500,000 par value for
102. They were originally issued on January 1, 1995 at 98 with a maturity date of
January 1, 2010. The bond issue costs relating to this transaction were $150,000. Kite
amortizes discounts, premiums, and bond issue costs using the straight-line method.
What amount of loss should Kite recognize on the redemption of these bonds (ignore
taxes)?
a. $90,000
b. $60,000
c. $50,000
d. $0
96. On its December 31, 2006 balance sheet, Lane Corp. reported bonds payable of
$6,000,000 and related unamortized bond issue costs of $320,000. The bonds had been
issued at par. On January 2, 2007, Lane retired $3,000,000 of the outstanding bonds at
par plus a call premium of $70,000. What amount should Lane report in its 2007 income
statement as loss on extinguishment of debt (ignore taxes)?
a. $0
b. $70,000
c. $160,000
d. $230,000
97. On January 1, 2002, Pine Corp. issued 1,000 of its 10%, $1,000 bonds for $1,040,000.
These bonds were to mature on January 1, 2012 but were callable at 101 any time after
December 31, 2005. Interest was payable semiannually on July 1 and January 1. On
July 1, 2007, Pine called all of the bonds and retired them. Bond premium was amortized
on a straight-line basis. Before income taxes, Pine's gain or loss in 2007 on this early
extinguishment of debt was
a. $30,000 gain.
b. $12,000 gain.
c. $10,000 loss.
d. $8,000 gain.
98. On June 30, 2007, Rosen Co. had outstanding 8%, $3,000,000 face amount, 15-year
bonds maturing on June 30, 2017. Interest is payable on June 30 and December 31.
The unamortized balances in the bond discount and deferred bond issue costs accounts
on June 30, 2007 were $105,000 and $30,000, respectively. On June 30, 2007, Rosen
acquired all of these bonds at 94 and retired them. What net carrying amount should be
used in computing gain or loss on this early extinguishment of debt?
a. $2,970,000.
b. $2,895,000.
c. $2,865,000.
d. $2,820,000.
99. A ten-year bond was issued in 2005 at a discount with a call provision to retire the
bonds. When the bond issuer exercised the call provision on an interest date in 2007,
the carrying amount of the bond was less than the call price. The amount of bond liability
removed from the accounts in 2007 should have equaled the
a. call price.
b. call price less unamortized discount.
c. face amount less unamortized discount.
d. face amount plus unamortized discount.
100. Starr Co. took advantage of market conditions to refund debt. This was the fourth
refunding operation carried out by Starr within the last three years. The excess of the
carrying amount of the old debt over the amount paid to extinguish it should be reported
as a
a. gain, net of income taxes.
b. loss, net of income taxes.
c. part of continuing operations.
d. deferred credit to be amortized over the life of the new debt.
*101. Brye Co. is indebted to Dole under a $400,000, 12%, three-year note dated December
31, 2005. Because of Brye's financial difficulties developing in 2007, Brye owed accrued
interest of $48,000 on the note at December 31, 2007. Under a troubled debt
restructuring, on December 31, 2007, Dole agreed to settle the note and accrued
interest for a tract of land having a fair value of $360,000. Brye's acquisition cost of the
land is $290,000. Ignoring income taxes, on its 2007 income statement Brye should
report as a result of the troubled debt restructuring
Gain on Disposal Restructuring Gain
a. $158,000 $0
b. $110,000 $0
c. $70,000 $40,000
d. $70,000 $88,000
$27,000 2
77. c [$1,027,000 – ( ———— × — )] × .4 = $410,600 (CV of retired bonds)
18 6
$200,000
95. a ($2,500,000 × 1.02) – [$2,300,000 + (————— × 12)] = $90,000.
15
$40,000
97. d [$1,040,000 – ( ———— × 11)] – ($1,000,000 × 1.01) = $8,000.
20
99. c Conceptual.
100. a Conceptual.