Chapter 11 Test with Solutions

CHAPTER 11 TRUE-FALSE STATEMENTS 1. All liabilities must be paid out of current earnings. 2. Current liabilities are expected to be paid within one year or the operating cycle, whichever is longer. 3. The relationship between current liabilities and current assets is important in evaluating a company's ability to pay off its long-term debt. 4. A company should try to keep its current ratio as high as possible. 5. Notes payable usually require the borrower to pay interest. 6. Notes payable are often used instead of accounts payable. 7. Accounts payable are usually interest-bearing. 8. A $15,000, 8%, 9-month note payable requires an interest payment of $900 at maturity. 9. Most notes are not interest bearing. 10. With an interest-bearing note, the amount of cash received upon issuance of the note generally exceeds the note's face value. MULTIPLE CHOICE QUESTIONS 11. Most companies pay current liabilities a. out of current assets. b. by issuing interest-bearing notes payable. c. by issuing stock. d. by creating long-term liabilities. 12. A current liability is a debt that can reasonably expected to be paid a. within one year. b. between 6 months and 18 months. c. out of currently recognized revenues. d. out of cash currently on hand. Use the following information for questions 13-15. Chase County Bank agrees to lend Agler Brick Company $300,000 on January 1. Agler Brick Company signs a $300,000, 8%, 9-month note. 13. The entry made by Agler Brick Company on January 1 to record the proceeds and issuance of the note is a. Interest Expense ...................................................................................... 18,000 Cash. ....................................................................................................... 282,000 Notes Payable ............................................................................... 300,000 b. Cash ....................................................................................................... Notes Payable ............................................................................... 300,000 300,000 1 c. d. Cash ....................................................................................................... Interest Expense ...................................................................................... Notes Payable ............................................................................... Cash ....................................................................................................... Interest Expense ...................................................................................... Notes Payable ............................................................................... Interest Payable ............................................................................ 300,000 18,000 318,000 300,000 18,000 300,000 18,000 14. What is the adjusting entry required if Agler Brick Company prepares financial statements on June 30? a. Interest Expense ...................................................................................... 12,000 Interest Payable ............................................................................ 12,000 b. Interest Expense ...................................................................................... 12,000 Cash .............................................................................................. 12,000 c. Interest Payable ....................................................................................... 12,000 Cash .............................................................................................. 12,000 d. Interest Payable ....................................................................................... 12,000 Interest Expense ........................................................................... 12,000 15. What entry will Agler Brick Company make to pay off the note and interest at maturity assuming that interest has been accrued to September 30? a. Notes Payable .......................................................................................... 318,000 Cash .............................................................................................. 318,000 b. Notes Payable .......................................................................................... 300,000 Interest Payable ....................................................................................... 18,000 Cash .............................................................................................. 318,000 c. Interest Expense ...................................................................................... 18,000 Notes Payable .......................................................................................... 300,000 Cash .............................................................................................. 318,000 d. Interest Payable ....................................................................................... 12,000 Notes Payable .......................................................................................... 300,000 Interest Expense ...................................................................................... 6,000 Cash .............................................................................................. 318,000 The interest expense on a $1,000, 4%, 3-month note is a. $10 b. $40 c. $100 d. $120 16. 17. A retail store credited the Sales account for the sales price and the amount of sales tax on sales. If the sales tax rate is 5% and the balance in the Sales account amounted to $168,000, what is the amount of the sales taxes owed to the taxing agency? a. $160,000. b. $168,000. c. $8,400. d. $8,000. 18. On December 31, 2005, Bertram Company had an outstanding note payable totaling $125,000. The note is due in equal annual installments of $25,000 on January 1 of each of the next 5 years. The current portion of long-term debt that should be reported on the December 31, 2005 balance sheet is a. $0 b. $25,000 c. $50,000 d. $125,000 19. Bonds with a face amount of $1,000,000 and a contractual interest rate of 8% are sold to yield 7.5%. The annual interest expense recorded for the bonds will be a. $5,000 2 b. c. d. $40,000 $75,000 $80,000. 20. The contractual rate of interest is usually stated as a. a monthly rate. b. a daily rate. c. a semiannual rate. d. an annual rate. 21. If twenty $1,000 convertible bonds with a carrying value of $25,000 are converted into 3,000 shares of $5 par value common stock, the journal entry to record the conversion is a. Bonds Payable ......................................................................................... 25,000 Common Stock ............................................................................. 25,000 b. c. d. 22. Bonds Payable ......................................................................................... Premium on Bonds Payable .................................................................... Common Stock ............................................................................. 20,000 5,000 Bonds Payable ......................................................................................... Premium on Bonds Payable .................................................................... Common Stock ............................................................................. Paid-in Capital in Excess of Par ................................................... 20,000 5,000 Bonds Payable ......................................................................................... Discount on Bonds Payable .......................................................... Common Stock ............................................................................. Paid-in Capital in Excess of Par ................................................... 25,000 25,000 15,000 10,000 5,000 15,000 5,000 A corporation issued $600,000, 10%, 5-year bonds on January 1, 2003 for $648,666 which reflects an effective-interest rate of 8%. Interest is paid semiannually on January 1 and July 1. If the corporation uses the effective-interest method of amortization of bond premium, the amount of bond interest expense to be recognized on July 1, 2003, is a. $30,000. b. $24,000. c. $32,433. d. $25,947. ANSWERS True and False 1. F 2. T 3.F 4. T 5. T 6. T 7. F 8. T 9. F 10. F Multiple Choice 11. A 12. A 13. B 14. A 15.B 16. A 18. B 19. C 20. D 21. C 22. D 17. C 3