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Travis County Bank agrees to lend Backyard Corporation $200,000 on January 1.Backyard signs a $200,000,4%,9-month note.Interest is due at maturity on September 30. A company pays $18,000 in interest on notes,consisting of $12,000 interest that accrued during the last accounting period and $6,000 of interest accumulated during this accounting period but not previously accrued on the books.The journal entry for the interest payment should:


A) debit Interest Expense for $18,000 and credit Cash for $18,000.
B) debit Cash for $18,000 and credit Interest Payable for $18,000.
C) debit Interest Expense for $6,000,debit Interest Payable $12,000 and credit Cash for $18,000.
D) debit Interest Payable for $12,000,debit Accrued Interest $6,000 and credit Cash for $18,000.

E) A) and D)
F) A) and B)

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Accrued payroll includes such liabilities as retirement and health benefits not yet paid.

A) True
B) False

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Under straight-line amortization,when a bond is sold at a premium,the annual premium amortization is the total premium divided by the number of years until bond maturity.

A) True
B) False

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Discount on bonds is a contra liability account.

A) True
B) False

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Contingent liabilities arise from past transactions or events but also depend on future events.

A) True
B) False

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When the amount of a contingent liability can be estimated and it is likely,the company should:


A) include a description in the footnotes to the financial statements.
B) record the estimated amount of the liability times the probability of its occurrence.
C) record the liability and estimated amount of the loss on the balance sheet.
D) omit the information about the contingent liability from its financial statements and footnotes.

E) None of the above
F) All of the above

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As a result of a drop in interest rates,a company retires bonds which had been issued at their face value of $200,000.The company bought the bonds back at 97.This retirement would be recorded with a:


A) debit of $200,000 to Bonds Payable,a credit of $6,000 to Gain on Bonds Retired,and a credit of $194,000 to Cash.
B) debit of $200,000 to Bonds Payable and a credit of $200,000 to Cash.
C) debit of $200,000 to Bonds Payable,a credit of $6,000 to Interest Expense,and a credit of $194,000 to Cash.
D) debit of $194,000 to Bonds Payable and a credit of $194,000 to Cash.

E) A) and B)
F) A) and D)

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When bonds payable are accounted for net of discount,the initial amount recorded in the Bonds Payable,Net account is the issue price of the bond.

A) True
B) False

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Multiple terms or descriptions are used to present the same idea in the area of bonds.Match all the appropriate terms or concepts that could be used to the blanks in the following. The cash payments made to creditors who have bought a company's bond are determined by multiplying the 1)_____________ times the 2)_____________ rate. The interest expense to the company,in the first period a bond is outstanding,is determined by multiplying the 3)_____________ times the 4)_____________ rate. A.Yield B.Coupon C.face value D.issue price E.effective interest F.par value G.Contract H.stated interest I.actual money received by issuer J.market interest

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1)C and F
...

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Which of the following is not used to calculate the times interest earned ratio?


A) Net income.
B) Income tax expense.
C) Interest earned on investments.
D) Interest expense.

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

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Your company sells $50,000 of bonds for an issue price of $48,000.Which of the following statements is correct?


A) The bonds sold at a price of 96,implying a discount of $4,000.
B) The bonds sold at a price of 48,implying a premium of $2,000.
C) The bonds sold at a price of 48,implying a premium of $4,000.
D) The bonds sold at a price of 96,implying a discount of $2,000.

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

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A company issued $400,000,10-year,10 percent bonds at 104.What is the issue price of these bonds?


A) $400,000
B) $386,000
C) $416,000
D) $440,000

E) None of the above
F) All of the above

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Encana Corp.is planning to issue $1,000 bonds with a stated interest rate of 7% and a maturity date of July 15,2019.Interest rates fall in the economy so that similar financial investments pay 5%.Encana will:


A) not be able to issue the bonds from the market because no one will buy them.
B) receive a higher issue price as buyers compete for the bonds.
C) have to accept a lower issue price to attract buyers.
D) have to reprint the bond certificates to change the stated interest rate to 5%.

E) None of the above
F) All of the above

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Which of the following statements best describes a contingent liability? A contingent liability is a:


A) liability,the amount of which is known and which definitely must be paid.
B) potential liability that has arisen because of a past transaction or event,but its ultimate outcome will not be known until a future event occurs or fails to occur.
C) liability that will only be incurred if a particular future event takes place.
D) potential liability that will be incurred if a natural disaster happens.

E) A) and D)
F) None of the above

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When the effective interest method of amortization is used,what happens to interest expense as a bond moves toward maturity?


A) Interest expense falls for bonds sold at either a discount or a premium.
B) Interest expense rises for bonds sold at a discount and falls for bonds sold at a premium.
C) Interest expense rises for bonds sold at either a discount or a premium.
D) Interest expense falls for bonds sold at a discount and rises for bonds sold at a premium.

E) A) and B)
F) None of the above

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A company typically records the amount owed to suppliers for goods or services when:


A) they are ordered.
B) a verbal commitment to buy has first been made.
C) they are paid for.
D) the goods or services are received.

E) B) and C)
F) None of the above

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Travis County Bank agrees to lend Backyard Corporation $200,000 on January 1.Backyard signs a $200,000,4%,9-month note.Interest is due at maturity on September 30. On January 1,which of the following journal entries will be made by Backyard to record the proceeds and issue of the note?


A) Debit interest expense $6,000 and cash $194,000; Credit notes payable $200,000
B) Debit cash $200,000; Credit notes payable $200,000
C) Debit interest expense $6,000 and cash $200,000; Credit notes payable $206,000
D) Debit cash $200,000 and interest expense $6,000; Credit notes payable $200,000 and interest payable $6,000

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

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Travis County Bank agrees to lend Backyard Corporation $200,000 on January 1.Backyard signs a $200,000,4%,9-month note.Interest is due at maturity on September 30. What adjusting entry did Backyard make on June 30 before preparing its financial statements?


A) Debit interest expense $4,000; Credit interest payable $4,000
B) Debit interest expense $4,000; Credit cash $4,000
C) Debit interest payable $4,000; Credit cash $4,000
D) Debit interest payable $4,000; Credit interest expense $4,000 ½ of the annual interest must be accrued at June 30.

E) None of the above
F) A) and C)

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Brief Respite,Inc.,sold underwear made from a fabric that gave many of its customers a serious rash.The customers are suing the company in a class action suit and Brief Respite's attorneys think it is probable that the case will cost the company $2 million,although the verdict is not yet in.The company should:


A) not include this information in its annual report.
B) record a liability and a gain for $2 million.
C) only explain the situation in the notes to the financial statements.
D) record a liability and a loss for $2 million.

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

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Which of the following statements is not true?


A) Bonds and promissory notes are two ways a company can borrow the funds necessary to finance its activities.
B) Both bonds payable and notes payable are typically initially recorded with a journal entry that debits cash and credits the relevant liability account.
C) The journal entry recording interest owed on bonds and notes includes a debit to interest expense and a credit to interest payable.
D) Bonds payable and notes payable are always non-current liability accounts.

E) B) and C)
F) None of the above

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