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Exam 7: Accounting for Liabilities

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Question 1

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On January 1, Year 1, the Hawks Company borrowed $100,000 from the Community Bank, issuing a three-year, 8% note payable. Payments of $38,803.35 are to be made each year on December 31. The payment will include both the interest and a portion of the principal. Using the table below, prepare an amortization schedule for the note.

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Question 2

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The Gordon Corporation issued $70,000 of 6%, 5-year bonds on January 1, Year 1 at 98. The interest payments are due on December 31 each year. Gordon uses the straight-line method of amortization.Which of the following answers shows the effect of the first interest payment and amortization of premium or discount?

A) Choice A
B) Choice B
C) Choice C
D) Choice D

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

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D

Question 3

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Davis Corporation borrowed $50,000 on January 1, Year 1. The loan is for a ten-year period and has an annual interest rate of 9%. At the end of each year, Davis will make a payment of $7,791, which includes both principal and interest. The amount of the payment for Year 1 that is reduction of principal is $3,587.

Which of the following reflects the effect of the year-end estimation of warranty expense?

San Jose Company issued five-year 8% bonds with a face value of $100,000, for $107,023.58 on January 1, Year 1 when the market (effective) rate of interest was 7%. The bonds pay annual interest each December 31. San Jose uses the effective interest method for amortization of premium or discount on bonds payable. (Round your answers to two decimal places.) Required:What is the annual amount of cash that San Jose will pay to bondholders for interest?What amount of interest expense and premium amortization should San Jose recognize for Year 1? What is the carrying amount of the liability on December 31, Year 1?What amount of interest expense and premium amortization should San Jose recognize for Year 2? What is the carrying amount of the liability on December 31, Year 2?What is the total amount of interest that San Jose will record in interest expense over the life of the bond?

Denver Company issued bonds with a face value of $100,000 and a stated interest rate of 8%. The bonds have a life of five years and were sold at 102 ½. If Denver amortizes discounts and premiums using the straight-line method, the amount of interest expense each full year would be:

Kier Company issued $700,000 in bonds on January 1, Year 1. The bonds were issued at face value and carried a 4-year term to maturity. They had a 6.50% stated rate of interest that was payable in cash on December 31st. Based on this information alone, the amount of interest expense shown on the December 31, Year 1 income statement and the cash flow from operating activities shown on the December 31, Year 1 statement of cash flows would be: $\begin{array}{cc} \text { Interest Expense } & \text { Cash Outflow } \\\end{array}$ A. $\begin{array}{cc}&\$45,500&&&&& \text { Zero } \\\end{array}$ B . $\begin{array}{cc}&\text { Zero } &&&&& \$45,500 \\\end{array}$ C. $\begin{array}{cc}&\$45,500 &&&& \$45,500 \\\end{array}$ D. $\begin{array}{cc}&\text { Zero } &&&&&\text { Zero } \\\end{array}$

Weller Company issued bonds with a face value of $340,000, a 9.50% stated rate of interest, and a 10-year term. The bonds were issued on January 1, Year 1, and Weller uses the effective interest method of amortization. The market rate of interest on the date of issue was 7.50%. Interest is paid annually on December 31.Assuming Weller issued the bond for $386,674, the amount of interest expense appearing on the Year 3 income statement would be:

Describe the effect on the accounting equation of the issuance of $500,000, 8% ten-year bonds at 103 1/2. Use numerical amounts in your answer.

What is the issue price of $200,000 in bonds that sell at 95.5?

When is warranty expense usually recognized?

Sales tax is reported as revenue when it is collected, and reported as an expense when it is paid.

Burger Barn has been named as a plaintiff in a $5 million lawsuit filed by a customer over the addictive nature of the company's french fries. Burger Barn's attorneys have advised them that the likelihood of a future obligation from the suit is remote. As a result of the lawsuit, Burger Barn should:

Does the amortization of a bond premium increase, decrease, or not affect interest expense for an accounting period? Explain.

Jones Company issued bonds with a $200,000 face value on January 1, Year 1. The five-year term bonds were issued at 97 and had a 7½% stated rate of interest that is payable in cash on December 31^st of each year. Jones amortizes the bond discount using the straight-line method. Based on this information:The amount of cash outflow from operating activities shown on Jones's December 31, Year 2 statement of cash flows would be:

Issuing a note payable is a(n) :

Franklin Company obtained a $155,000 line of credit from the State Bank on January 1, Year 1. The company agreed to accept a variable interest rate that was set at 2% above the bank's prime lending rate. The bank's prime rate of interest and the amounts borrowed or repaid during the first three months of Year 1 are shown in the following table. Assume that Franklin borrows or repays on the first day of each month. Borrowing is shown as a positive amount and repayments are shown as negative amounts indicated by parentheses. $\begin{array}{lrr}&\text { Amount Borrowed (Repaid) }&\text { Prime Rate for the Month }\\1 \text {-January } & \$ 50,000 & 4.0 \% \\\text { 1-February } & (20,000) & 4.5\% \\\text { 1-March } & 50.000 & 5.0 \%\end{array}$ Based on this information alone, the amount of interest expense recognized in March would be closest to: (Do not round intermediate calculations. Round your answer to the nearest whole number.)

The carrying value of a bond issued at a premium:

Wayne Company issued bonds with a face value of $600,000, a 6% stated rate of interest, and a 10-year term. The bonds were issued on January 1, Year 1, and Wayne uses the straight-line method of amortization. Interest is paid annually on December 31.Assuming Wayne issued the bonds for 102½, the carrying value of the bonds on the December 31, Year 1 balance sheet would be:

On January 1, Year 1, the Mahoney Company borrowed $180,000 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 $45,082.The amount of principal repayment included in the December 31, Year 1 payment is: