IAsgn8.docx

1、IAsgn8LESSON 8 AssignmentQuestion 1 (22 marks)Multiple choice (1 marks each)a. Which of the following best describes the defendants accounting or reporting for an unresolved lawsuit? 1) An estimated liability should be recorded on the balance sheet.2) It should always be recorded in the income state

2、ment and balance sheet.3) It should always be disclosed in the notes to the financial statements.4) It should be recorded if payment is probable and the amount can reasonably be estimated.1) Incorrect. Refer to (4).2) Incorrect. Refer to (4).3) Incorrect. Refer to (4).4) Correct. An unresolved lawsu

3、it should be recorded in the defendants accounting records if a payment is probable and the amount can reasonably be estimated. If a payment is probably but cannot be reasonably estimated then it should be disclosed in the notes to the financial statements.b. How should obligations that are not expe

4、cted to be paid within one year be reported? 1) As current assets2) As current liabilities3) As long-term liabilities4) As operating cycle liabilities 1) Incorrect. Current assets are not obligations (or liabilities).2) Incorrect. Current liabilities are those that are to be paid within one year or

5、one accounting cycle whichever is longer.3) Correct. Obligations (or liabilities) that are not expected to be paid within one year should be reported as long-term liabilities.4) Incorrect. Operating cycle liabilities imply current liabilities which are paid within one year or one cycle.c. What does

6、a bond traded at 971/2 mean?1) The bond pays 2.5% interest.2) The bond is currently traded at 1,025 per 1,000 bond. 3) The market rate of interest is 2.5%.4) The market interest rate is greater than the bond coupon rate. 1) Incorrect. The bond pays 2.5% interest.2) Incorrect. The bond is currently t

7、raded at 1,025 per 1,000 bond. 3) Incorrect. The market rate of interest is 2.5%.4) Correct. The market interest rate is greater than the bond coupon rate.d. What does a bond traded at 1021/2 mean? 1) The bond pays 2.5% interest.2) The bond is currently traded at 1,025 per 1,000 bond. 3) The market

8、rate of interest is 2.5%.4) The market interest rate is greater than the bond coupon rate. 1) Incorrect. The contract (or coupon) rate describes the interest paid on a bond.2) Correct. A bond trading at 1021/2 means the bond is currently traded at 1,025 per 1,000 bond. 3) Incorrect. The market rate

9、of interest determines the trading price of a bond but it is not calculated as the 1021/2 less 100.4) Incorrect. If a bond is trading at 1021/2, the market interest rate is lower than the bond coupon (or contract) rate.e. Which of the following is true of a discount on bonds payable?1) Occurs when a

10、 company issues bonds for more than the par value2) Occurs when a company issues bonds and the market rate is less than the contract rate3) Is considered to be a contra liability4) Is debited on each interest payment date 1) Incorrect. A discount on bonds payable occurs when a company issues bonds f

11、or less than the par value.2) Incorrect. A discount on bonds payable occurs when a company issues bonds and the market rate is greater than the contract (or coupon) rate.3) Correct. The Discount on bonds payable account is considered to be a contra liability.4) Incorrect. The Discount on bonds payab

12、le account is credited on each interest payment date.f. Which of the following phrases accurately describes the effective interest rate method? 1) Allocates bond interest expense using a changing interest rate 2) Allocates bond interest expense using a constant interest rate 3) Allocates a decreasin

13、g amount of interest over the life of a discounted bond4) Allocates interest using the current market rate1) Incorrect. The straight-line interest method allocates bond interest expense using a changing interest rate. 2) Correct. The effective interest rate method allocates bond interest expense usi

14、ng a constant interest rate. 3) Incorrect. The effective interest method allocates an increasing amount of interest over the life of a discounted bond.4) Incorrect. The effective interest method allocates interest using the market rate in effect on the date the bond was issued.g. Adidas issued 200,0

15、00, 10-year, 8%, semi-annual bonds. The market rate on the issue date was 7.5%. Adidas received 206,948 in proceeds. Which of the following statements is correct?1) Adidas must pay 200,000 at maturity.2) Adidas must pay 20 interest payments of 8,000 each semi-annual period plus 200,000 at maturity.

16、3) Adidas must pay 206,948 at maturity. 4) Adidas must pay 20 interest payments of 8,000 each semi-annual period plus 206,948 at maturity. 1) Incorrect. Refer to (2).2) Correct. Adidas must pay 20 interest payments of 8,000 each semi-annual period plus 200,000 at maturity. 3) Incorrect. Refer to (2)

17、. 4) Incorrect. Refer to (2).h. A company has 100,000 (par value) of bonds outstanding. The unamortized discount on these bonds is 4,500. The company redeemed these bonds for 97% of par. What was the gain (loss) on the redemption? 1) (1,500)2) (3,000)3) 1,5004) 3,0001) Correct. The loss on redemptio

18、n was (1,500)* calculated as: cash paid of 97,000 (= 100,000 97%) plus the unamortized discount of 4,500 = 101,500 less the 100,000 par value of the bond = a loss of 1,500.2) Incorrect. Refer to (1).3) Incorrect. Refer to (1).4) Incorrect. Refer to (1).* This may be clarified by reviewing the actual

19、 journal entry:Bonds payable 100,000Loss on redemption of bond 1,500 Cash 97,000 Discount on bonds payable 4,500i. Zero Industrial Inc. retires its bonds at 105 on January 1 immediately following the payment of semi-annual interest. The carrying value of the bonds at the redemption date is 103,745 (

20、100,000 face value). Zeros journal entry to record the redemption will include which of the following?1) Debit to Premium on Bonds2) Credit to Premium on Bonds 3) Debit to Discount on Bonds4) Credit to Gain on Retirement of Bonds1) Correct. Zeros journal entry to record the redemption will include a

21、 debit to Premium on Bonds. The complete journal entry would be as follows:Bonds payable 100,000Premium on bonds payable 3,745Loss on redemption of bond 1,255 Cash 105,0002) Incorrect. Refer to (1).3) Incorrect. Refer to (1).4) Incorrect. Refer to (1).j. On September 30, a 30,000, 6%, 3-year instalm

22、ent note payable is recorded by the Baker Company. The note requires that 10,000 of principal plus accrued interest be paid at the end of each year (September 30). The journal entry to record the second annual payment would include which of the following? 1) A debit to Interest Expense for 1,8002) A

23、 debit to Interest Expense for 1,200 3) A credit to Cash for 11,8004) A credit to Cash for 10,000 1) Incorrect. Refer to (2).2) Correct. The journal entry to record the second annual payment would include a debit to Interest Expense for 1,200. The complete journal entry would be as follows:Note paya

24、ble 10,000Interest expense 1,200 Cash 11,200 30,000 10,000 = 20,000 6% = 1,2003) Incorrect. Refer to (2).4) Incorrect. Refer to (2). k. If on December 31, 20X6, Asta Corporation borrowed 65,000 by signing a 5-year, 14% instalment note requiring annual payments (on December 31) of accrued interest pl

25、us equal amounts of principal, what journal entry would record the first payment on December 31, 20X7? 1) Interest Expense 1,820.00 Notes Payable 13,000.00 Cash 14,820.002) Notes Payable 14,820.00 Interest Payable 1,820.00 Cash 13,000.003) Interest Expense 9,100.00 Notes Payable 13,000.00 Cash 22,10

26、0.004) Notes Payable 13,000.00 Cash 13,000.001) Incorrect. Refer to (3).2) Incorrect. Refer to (3).3) Correct. Interest Expense 9,100.00Notes Payable 13,000.00 Cash 22,100.004) Incorrect. Refer to (3).l. Barnes Company issues 750,000, 9%, 20-year, semi-annual bonds. The current market rate is 8.5%.

27、What is the total amount of interest owed to the bondholders for the semi-annual interest payment?1) 67,500 2) 63,750 3) 37,500 4) 33,750 1) Incorrect. Refer to (4). 2) Incorrect. Refer to (4).3) Incorrect. Refer to (4).4) Correct. 750,000 9% 6/12 = 33,750m. Fila issued 100,000 of 5-year, 7% bonds.

28、The current market rate was 7.5%. Fila received 97,947 for the bonds. Using the straight-line method of interest amortization, what was the amount of interest expense for the first semi-annual payment? 1) 3,500.002) 3,705.303) 3,673.014) 3,428.151) Incorrect. Refer to (2).2) Correct. 100,000 7% 6/12

29、 = 3,500.00 + (2,053 total discount 10=205.30) = 3,705.30 3) Incorrect. Refer to (2). 4) Incorrect. Refer to (2).n. Avia sells 100,000 of its 9% bonds at par on April 1, which is 4 months after the original date. What is the unearned interest that Avia should collect from the buyer?1) 7502) 5,2503)

30、1,5004) 3,0001) Incorrect. Refer to (4).2) Incorrect. Refer to (4).3) Incorrect. Refer to (4).4) Correct. The unearned interest that Avia should collect from the buyer is 3,000 calculated as 100,000 9% 4/12 = 3,000.o. Instalment notes payable that require payments of accrued interest to date plus eq

31、ual amounts of principal result in which of the following? 1) Periodic payments that gradually decrease in amount2) Equal periodic payments3) Periodic payments that gradually increase in amount4) Increasing amounts of interest each period1) Correct. Installment notes payable that require payments of accrued interest to date plus equal amounts of principal result in periodic payments that gradually decrease in amount.2) Incorrect. Installment notes payable that require equal periodic payments include increasing amounts of principal and decreasi