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Chapter 10 - Liabilities

Chapter 10 Liabilities Answer Key

Multiple Choice Questions

46. U. S. GAAP requires that convertible bonds be classified on the balance sheet as: A. Part liability, part equity B. A liability C. Either a liability or equity D. As an asset 47. International accounting standards require that convertible bonds be classified on the balance sheet as: A. Part liability, part equity B. A liability C. Either a liability or equity D. As an asset

48. Off balance sheet financing may involve either: A. An operating lease B. A special purpose entity C. Both of the above D. Neither of the above 49. Employers are required to pay all of the following on the wages paid to each employee except: A. Social security taxes B. Worker's compensation insurance C. Medicare taxes D. Health insurance benefits. 50. In preparing an amortization table, it is necessary to include: A. The original amount of the liability, the amount of periodic payments and the interest rate. B. The original amount of the liability, the amount of periodic payments and the amount of past payments. C. The monthly payment, the total amount of past payments and the original amount of the liability. D. The total amount of past payments, the interest rate and the amount of periodic payments.

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Chapter 10 - Liabilities

51. A company issues $50 million of bonds at par on January 1, 2009. The bonds pay 10% interest semi-annually on 12/31 and 6/30 and mature in 20 years. The journal entry when the bonds are sold is: A)

B)

C)

D)

A. Option A B. Option B C. Option C D. Option D

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Chapter 10 - Liabilities

52. The amount of the present value of a future cash receipt will depend upon A. The length of time until the money is received. B. The amount of money to be received. C. The required rate of return. D. All of the above.

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53. The FICA tax paid by an employer is: A. Greater than the amount paid by the employee. B. Less than the amount paid by the employee. C. Equal to the amount paid by the employee. D. The employer does not pay FICA tax, only the employee pays the tax.

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54. When a company sells bonds between interest dates they will pay which of the following at the first interest payment date? A. An amount less than the stated interest rate times the principal. B. An amount more than the stated interest rate times the principal. C. An amount equal to the stated interest rate times the principal. D. The company may skip the first interest payment date since the appropriate time has not passed.

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Chapter 10 - Liabilities

55. A $1,000 bond that sells for 104 has a selling price of: A. $1,004 B. $1,040 C. $1,400 D. $1,000

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56. Which of the following is not an accurate statement regarding the distinction between debt and equity? A. Only equity is considered a source of financing for operations of the business, since debt must be repaid at a specified maturity date. B. If a business ceases operations and liquidates, claims of all creditors have legal priority over claims of the stockholders. C. Most debt requires the borrower to pay interest; equity financing does not obligate the company to make a specified payment. D. The providers of equity are owners of the business; the providers of borrowed funds are creditors.

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57. Which of the following is not a characteristic of current liabilities? A. They are due within one year or within the operating cycle, whichever is longer. B. They may involve estimated amounts. C. They may be replaced with a new short-term liability rather than being paid in cash. D. All three of the above are characteristic of current liabilities.

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Chapter 10 - Liabilities

58. If a bond is selling at 103, it is selling at: A. Maturity value and yields a 2% interest rate. B. A discount. C. A premium. D. $103 per bond.

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59. Which of the following payroll costs are shared equally by the employer and the employee? A. State unemployment taxes. B. Workers' compensation. C. Social security. D. Federal unemployment taxes.

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60. Interest payable on a loan becomes a liability: A. When the note payable is issued. B. As it accrues. C. At the maturity date. D. When the borrowed money is received.

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Chapter 10 - Liabilities

61. An employer's total payroll-related costs always exceed the wages and salaries earned by employees by: A. Amounts withheld from employees' pay. B. Payroll taxes and mandated programs such as workers' compensation insurance. C. 50%. D. None of the above. Employers' payroll-related costs actually are less than the gross wages and salaries earned by employees, because of amounts withheld from employees' checks.

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62. Bonds, with the same face value, issued at a premium will: A. Have a greater maturity value than a bond issued at a discount. B. Have a lesser maturity value than a bond issued at a discount. C. Have the same maturity value as a bond issued at a discount. D. Have a different maturity value than a bond issued at a discount, depending upon the interest rate and maturity date.

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63. The amounts that a business withholds as taxes from an employee's earnings: A. Represent payroll taxes expense to the employer. B. Are deposited in an interest-bearing account until the employee is terminated. C. Represent miscellaneous revenue to the employer. D. Represent current liabilities to the employer.

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Chapter 10 - Liabilities

64. Unearned revenue: A. Appears on the income statement as income. B. Appears on the income statement as a reduction to income. C. Appears on the income statement as a liability. D. Appears on the balance sheet as a liability.

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The average employee of Girard Corporation earns gross pay of $75,000 per year. The following table shows the relative size of various payroll amounts by expressing each as a percentage of total wages and salaries expense (gross pay):

In addition, Girard pays $425 per month per employee for group health insurance.

65. Refer to the above data. Which of the following is the largest payroll-related expense incurred by Girard? A. Group health insurance premiums. B. Income taxes expense. C. The employer's share of social security taxes. D. Wages and salaries expense.

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Chapter 10 - Liabilities

66. Refer to the above data. Which of the following represents the second largest payroll related expense incurred by Girard? A. Group health insurance premiums. B. Income taxes expense. C. The employer's share of social security taxes and Medicare taxes. D. Wages and salaries expense.

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67. Refer to the above data. Which of the following represents the largest amount withheld from employees' paychecks? A. Workers' compensation insurance. B. Social Security and Medicare. C. Personal income taxes. D. Group health insurance.

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68. When a corporation has a right to redeem bonds in advance of the maturity date, the bond is considered a: A. Convertible bond. B. Callable bond. C. Junk bond. D. Debenture bond.

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Chapter 10 - Liabilities

69. Sinking funds usually appear on the balance sheet as: A. Current asset. B. Long-term investment. C. Current liability. D. Appropriation of retained earnings.

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70. A bond that is not secured is also known as: A. A sinking fund. B. A mortgage. C. A debenture. D. A junk bond.

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71. Management has both the intent and the ability to refinance a liability maturing in four months by taking out a new loan at the due date which would not be due for several years. How would this situation be reported in financial statements prepared as of today's date? A. The original liability is classified as current, with a footnote describing management's plan for refinancing. B. The original liability is classified as current and the new loan is reported as a long-term liability. C. The original liability is classified as long-term; the new loan is not included in liabilities at this date. D. The original liability need not be reported at all; only the new loan is reported as a longterm liability.

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Chapter 10 - Liabilities

72. Temple Corporation purchased a piece of real estate, paying $400,000 cash and financing $700,000 of the purchase price with a 10-year, 15% installment note. The note calls for equal monthly payments that will result in the debt being completely repaid by the end of the tenth year. In this situation: A. The aggregate amount of the monthly payments is $700,000. B. Each monthly payment is greater than the amount of interest accruing each month. C. The portion of each payment representing interest expense will increase over the 10-year period, since principal is being paid off, yet the payment amount does not decrease. D. The portion of each monthly payment representing repayment of principal remains the same throughout the 10-year period.

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73. When an installment note is structured as a "fully amortizing" loan with equal monthly payments (such as a traditional mortgage): A. The portion of each payment allocated to interest expense is the same each month. B. The sum of the monthly payments is equal to the amount of the installment note (mortgage). C. The difference between the sum of all monthly payments and the principal amount of the note constitutes interest. D. The portion of each payment allocated to repayment of principal decreases each month as the mortgage is paid off.

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Chapter 10 - Liabilities

74. In relation to a bond issue, the role of the underwriter is to: A. Guarantee payment to bondholders of both the periodic interest payments and the maturity value. B. Purchase the entire bond issue from the issuing corporation and then sell the bonds to the public. C. Represent the interests of the bondholders and, if necessary, to take legal action on their behalf. D. Maintain a subsidiary ledger of individual bondholders and mail out the periodic interest checks.

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75. If a bond is issued at par and between interest dates: A. The cash received by the corporation will be less than the face value of the bond. B. The cash received by the corporation will be greater than the face value of the bond. C. The cash received by the corporation will be the same as the face value of the bond. D. Interest receivable will be debited.

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76. The term "junk bonds" describes bonds with: A. Low interest rates. B. Indefinite maturity dates. C. Low maturity values. D. High risk.

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Chapter 10 - Liabilities

77. One advantage of issuing bonds instead of stock is that: A. Interest is tax deductible whereas dividends are not. B. Bonds have a longer maturity date. C. Interest rates are lower than dividend rates. D. The issuance of bonds does not affect earnings per share.

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78. Choose the statement that correctly summarizes the tax advantage of raising money by issuing bonds instead of common stock: A. The amount paid by the corporation to redeem bonds at maturity date is deductible in computing income subject to corporate income tax. B. Interest payments are deductible in determining income subject to corporate income tax; dividends are not deductible. C. A corporation must pay tax on the sales price of stock issued, but is not taxed on the amount received when bonds are issued. D. Both interest and dividends paid are deductible in computing taxable income, but since interest must be paid annually, the corporation usually gets a larger tax deduction over the life of the bonds payable.

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79. Elm Corporation plans to invest $300 million to earn about 15% before income taxes. The company is considering whether it should raise the $300 million by issuing 10% bonds payable or capital stock. If the company issues the bonds, it will probably report: A. Lower net income and lower income taxes expense than if it issues capital stock. B. Higher net income and higher income taxes expense than if it issues capital stock. C. Lower net income and higher income taxes expense than if it issues capital stock. D. Higher net income and lower income taxes expense than if it issues capital stock.

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Chapter 10 - Liabilities

80. The current portion of long-term debt should be reported: A. Separately in the long-term liabilities section of the balance sheet. B. In the long-term liabilities section of the balance sheet, along with the other long-term debt. C. In the current liabilities section of the balance sheet. D. In a separate section of the balance sheet, between long-term liabilities and shareholders' equity.

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81. An operating lease: A. Creates an asset and a liability on the balance sheet. B. Is a form of off-balance sheet financing. C. Is always preferable to a capital lease. D. Transfers title to the asset being leased.

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82. Suppose investors decided to sell their holdings of capital stock in order to purchase outstanding bonds payable and as a result, the prices of bonds payable increased. What would be the likely impact on market interest rates? A. Market interest rates will be unaffected. B. Market interest rates will increase. C. Market interest rates will fall. D. Although interest rates will change, it is impossible to predict the direction of change.

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Chapter 10 - Liabilities

83. Which one of the following is not considered a criteria to capitalize a lease? A. The lease contains a bargain purchase option. B. The lease transfers ownership at the end of the lease term. C. The lease term is more than 75% of economic life of the property. D. The present value of minimum lease payments is less than 90% of the fair market value of the asset.

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84. Which of the following payroll taxes do not stop once an employee reaches a certain level of income: A. Medicare taxes. B. Social security taxes. C. Unemployment taxes. D. All three of the above have a cap on salaries where the tax ends.

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85. The price at which a bond sells is equal to the: A. Maturity value of the bonds plus the present value to investors of the future interest payments. B. Sum of the future interest payments, minus the maturity value of the bonds. C. Present value to investors of the future principal and interest payments. D. Sum of the future interest payments, plus the maturity value of the bonds.

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Chapter 10 - Liabilities

86. After bonds have been issued, their market value can be expected to: A. Rise as any premium is amortized B. Fall if interest rates rise. C. Fall as any discount is amortized. D. Rise if interest rates rise.

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87. The amortization of a bond discount: A. Decreases the carrying value of a bond and increases interest expense. B. Decreases the carrying value of a bond and decreases interest expense. C. Increases the carrying value of a bond and increases interest expense. D. Increases the carrying value of a bond and decreases interest expense.

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88. Which of the following does not affect the market price of an outstanding bond issue? A. Fluctuations in the current market rate of interest. B. The credit rating of the issuing corporation. C. The price at which the bonds were originally issued. D. The length of time remaining until the bonds' maturity date.

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Chapter 10 - Liabilities

89. Each of the following must be disclosed in the financial statements, except: A. The total amounts of long-term debt maturing in each of the next five years. B. The company's debt ratio and interest coverage ratio for the current year. C. Loss contingencies, when a reasonable possibility exists that a material...