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Exam 7: Accounting for Liabilities

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Question 71

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Riley Company borrowed $24,000 on April 1, Year 1 from the Titan Bank. The note issued by Riley carried a one year term and a 4% annual interest rate. Riley earned cash revenue of $900 in Year 1 and $500 in Year 2. Assume no other transactions.The amount of cash flow from operating activities that would appear on the Year 2 statement of cash flows would be:

A) $260 inflow
B) $500 inflow
C) $24,260 outflow
D) $460 outflow

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

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Question 72

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A five-year, $500,000 bond was issued on January 1, Year 1. The stated rate of interest was 8%, and the effective rate of interest was 10%. The interest is paid semiannually. Which of the following statements is correct?

A) This bond was issued at a premium, and each semiannual cash payment is $25,000.
B) This bond was issued at a discount, and each semiannual cash payment is $20,000.
C) This bond was issued at a discount, and the annual interest expense is $40,000.
D) This bond was issued at a premium, and the annual interest expense is $40,000.

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

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Question 73

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Morrison Company issued $200,000 of 10-year, 8% bonds at 92 on July 1, Year 1. Interest is payable semiannually on January 1, and July 1. The company uses straight-line amortization for premium or discount on bonds payable. Required:What amount of interest expense will be shown on the Year 1 and Year 2 income statements?What amount of interest payments will be shown on the statement of cash flows for Year 1 and Year 2?

The party who borrows money in a note payable is known as the:

Victor Company issued bonds with a $400,000 face value and a 3% stated rate of interest on January 1, Year 1. The bonds carried a 5-year term and sold for 93. Victor uses the straight-line method of amortization. Interest is payable on December 31 of each year.The amount of cash flow from operating activities on the December 31, Year 3 statement of cash flows would be:

On January 1, Year 1, The Hanover Corporation issued $52,750 of 9%, 5-year bonds at 99. Hanover uses the straight-line method of bond discount amortization. The interest payments are due on December 31 each year. How much interest expense will Hanover report on its income statement on December 31, Year 1? (Do not round intermediate calculations. Round your answer to nearest whole dollar.)

Issuing bonds payable when the market rate of interest is less than the stated interest rate:

On January 1, Year 1, the Mahoney Company borrowed $324,000 cash from Sun Bank by issuing a five-year 8% term note. The principal and interest are repaid by making annual payments beginning on December 31, Year 1. The annual payment on the loan based on the present value of annuity factor would be $81,150.The amount of principal repayment included in the December 31, Year 1 payment is:

Wilson Company earned $2,000 of cash sales. Sales tax is 10%. Which of the following shows how this event would affect the company's financial statements (ignore the effects of cost of goods sold) ?

North Woods Company has a line of credit with the Olympia State Bank. North Woods agreed to pay interest at an annual rate equal to 3% above the bank's prime rate. Funds are borrowed or repaid on the first day of each month and interest is paid in cash on the last day of each month. Borrowing is shown as a positive amount, and repayments are shown as negative amounts indicated by parentheses. Activity to date is given as follows: $\begin{array}{lrr}\text { Month}&\text { Amount Borrowed (Repaid) }&\text { Prime Rate for the }\\&&\text { Month}\\\text { January } & \$ 22,000 & 5\% \\\text { February } & 33,000 & 6\% \\\text { March } & (22,000) & 3 \%\end{array}$ The amount of interest paid at the end of March would be: (Do not round intermediate calculations.)

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, Briand 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. Indicate the effects of the payment of interest and amortization of the discount.

Amortization of a discount on bonds payable is an asset use transaction.

If a company offers a warranty on the products it sells, the company records the warranty expense at the time that the warranty service is provided to customers under the terms of the warranty.

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, Kirkland Company paid cash for interest on bonds it had issued on January 1, Year 1 at 101 1/2, and amortized part of the premium on bonds. Indicate the effects of the payment of interest and amortization of the premium.

Which of the following shows how remitting (paying) sales tax will affect the financial statements of the company making the payment?

Rodgers Equipment Company sold a ten-year, 6% bond issue at 102 ½. Rodgers received proceeds of $256,250 from the sale of these bonds. Calculate the face amount of these bonds.

In December Year 1, Lucas Corporation sold merchandise for $10,000 cash. Lucas estimated that $700 of warranty claims might be filed in regard to these sales. On February 12, Year 2, Lucas paid cash of $550 to settle a related warranty claim by this customer.Which of the following answers indicates the effect of the February 12, Year 2 transaction on the financial statements of Lucas Corporation?

West Company borrowed $10,000 on September 1, Year 1 from the Valley Bank. West agreed to pay interest annually at the rate of 6% per year. The note issued by West carried an 18-month term. Based on this information the amount of interest expense appearing on West's Year 1 income statement would be:

Monthly remittance of sales tax:

Recognizing the obligation for product warranties is a claims exchange transaction.