CHAPTER 10

REPORTING AND ANALYZING LIABILITIES

CHAPTER LEARNING OBJECTIVES

1. Explain how to account for current liabilities. A current liability is a debt that a company can reasonably expect to pay (a) from existing current assets or through the creation of other current liabilities, and (b) within one year or the operating cycle, whichever is longer. The major types of current liabilities are notes payable, accounts payable, sales taxes payable, unearned revenues, and accrued liabilities such as taxes, salaries and wages, and interest payable.

When a promissory note is interest-bearing, the amount of assets received upon the issuance of the note is generally equal to the face value of the note, and interest expense is accrued over the life of the note. At maturity, the amount paid is equal to the face value of the note plus accrued interest.

Companies record sales taxes payable at the time the related sales occur. The company serves as a collection agent for the taxing authority. Sales taxes are not an expense to the company. Companies hold employee withholding taxes and credit them to appropriate liability accounts until they remit these taxes to the governmental taxing authorities. Unearned revenues are initially recorded in an unearned revenue account. As the company recognizes revenue, a transfer from unearned revenue to revenue occurs. Companies report the current maturities of long-term debt as a current liability in the balance sheet.

2. Describe the major characteristics of bonds. The following different types of bonds may be issued: secured and unsecured bonds, and convertible and callable bonds.

3. Explain how to account for bond transactions. When companies issue bonds, they debit Cash for the cash proceeds and credit Bonds Payable for the face value of the bonds. In addition, they use the accounts Premium on Bonds Payable and Discount on Bonds Payable to show the bond premium and bond discount, respectively. Bond discount and bond premium are amortized over the life of the bond, which increases or decreases interest expense, respectively.

When companies redeem bonds at maturity, they credit Cash and debit Bonds Payable for the face value of the bonds. When companies redeem bonds before maturity, they (a) eliminate the carrying value of the bonds at the redemption date, (b) record the cash paid, and (c) recognize the gain or loss on redemption.

4. Discuss how liabilities are reported and analyzed. Current liabilities appear first on the balance sheet, followed by long-term liabilities. Companies should report the nature and amount of each liability in the balance sheet or in schedules in the notes accompanying the statements. They report inflows and outflows of cash related to the principal portion of long-term debt in the financing section of the statement of cash flows.

The liquidity of a company may be analyzed by computing the current ratio. The long-run solvency of a company may be analyzed by computing the debt to assets ratio and the times interest earned ratio. Other factors to consider are contingent liabilities and lease obligations.

*5. Apply the straight-line method of amortizing bond discount and bond premium. The straight-line method of amortization results in a constant amount of amortization and interest expense per period.

*6. Apply the effective-interest method of amortizing bond discount and bond premium. The effective-interest method results in varying amounts of amortization and interest expense per period but a constant percentage rate of interest. When the difference between the straight-line and effective-interest method is material, GAAP requires the use of the effective-interest method.

*7. Explain how to account for long-term notes payable. Each payment consists of (1) interest on the unpaid balance of the loan, and (2) a reduction of loan principal. The interest decreases each period, while the portion applied to the loan principal increases each period.

Difficulties:

Easy: 144

Medium: 146

Hard: 29

QUESTIONS BY SECTION

Accounting for Current Liabilities: 129, 264

What is a Current Liability?: 1, 3, 4, 67, 68, 69, 70, 71, 72, 73, 74, 75, 276, 294, 295

Notes Payable: 5, 6, 7, 8, 9, 10, 11, 12, 76, 77, 78, 79, 80, 81, 82, 83, 84, 85, 86, 87, 88, 89, 90, 91, 130, 265, 277, 278, 279, 296, 297

Sales Taxes Payable: 15, 16, 17, 18, 92, 94, 95, 96, 97, 98, 102, 103, 104, 105, 106, 107, 108, 109, 110, 111, 112, 126, 128, 266, 267, 280, 298

Unearned Revenues: 14, 20, 21, 93, 122, 123, 124, 125, 268

Current Maturities of Long-term Debt: 2, 13, 99, 100, 101, 117

Payroll and Payroll Taxes Payable: 19, 113, 114, 115, 116, 118, 119, 120, 121, 127, 281, 299, 311

Characteristics of Bonds: 23, 24, 28, 132

Types of Bonds: 27

Secured and Unsecured Bonds: 26, 134, 138, 141, 300, 302

Convertible and Callable Bonds: 25, 30, 139, 140, 143, 152, 154, 312

Issuing Procedure: 34, 144, 145, 146, 153, 301

Bond Trading: 133, 135, 136, 137, 142, 269

Determining the Market Price of a Bond: 22, 29, 31, 32, 33, 131, 147, 148, 149, 150, 151, 155, 156, 157, 303, 313, 315

Accounting for Bond Transactions: 270

Issuing Bonds at Face Value: 48, 166, 170, 174, 175, 271, 304

Discount or Premium on Bonds: 36, 39, 319

Issuing Bonds at a Discount: 35, 42, 43, 44, 45, 47, 158, 159, 160, 161, 165, 167, 168, 176, 179, 180, 182, 183, 184, 195, 305, 314

Issuing Bonds at a Premium: 37, 38, 40, 41, 46, 162, 163, 164, 169, 171, 172, 173, 177, 178, 181, 306

Redeeming Bonds at Maturity: 191, 196, 197, 290

Redeeming Bonds before Maturity: 49, 50, 185, 186, 187, 188, 189, 190, 192, 193, 194, 282, 316

Presentation and Analysis): 317

Presentation: 51, 209, 210, 283, 284, 307

Analysis: 198, 285

Liquidity: 204, 205, 276

Solvency: 52, 53, 200, 201, 202, 206, 207, 208, 211, 308

Contingencies:

Off-Balance-Sheet Financing: 199, 203

Straight-Line Amortization: 58, 309

Amortizing Bond Discount: 55, 212, 213, 214, 221, 222, 224, 231, 232, 233, 234, 240, 241, 273, 290

Amortizing Bond Premium: 54, 56, 57, 215, 216, 217, 218, 219, 220, 223, 225, 226, 227, 228, 229, 230, 235, 236, 237, 238, 239, 272, 286, 287, 288, 289

Effective-Interest Amortization: 59, 61, 62, 242, 251, 318

Amortizing Bond Discount: 60, 243, 245, 246, 247, 248, 275

Amortizing Bond Premium: 244, 249, 250, 274, 291, 292

Accounting for Long-term Notes Payable:63, 64, 65, 66, 252, 253, 254, 255, 256, 257, 258, 259, 260, 261, 262, 263, 293

TRUE-FALSE STATEMENTS

1. A current liability must be paid out of current earnings.

2. If any portion of a long-term debt is to be paid in the next year, the entire debt should be classified as a current liability.

3. Current liabilities are expected to be paid within one year or the operating cycle, whichever is longer.

4. A company whose current liabilities exceed its current assets may have a liquidity problem.

5. Interest expense is reported under Other Expenses and Losses in the income statement.

6. Notes payable usually require the borrower to pay interest.

7. Notes payable are often used instead of accounts payable.

8. A note payable must always be paid before an account payable.

9. A $20,000, 8%, 9-month note payable requires an interest payment of $1,200 at maturity.

10. Most notes are not interest-bearing.

11. With an interest-bearing note, the amount of cash received upon issuance of the note generally exceeds the note's face value.

12. Interest expense on a note payable is only recorded at maturity.

13. Current maturities of long-term debt refer to the amount of interest on a note payable that must be paid in the current year.

14. Unearned revenues should be classified as Other Revenues and Gains on the income statement.

15. The higher the sales tax rate, the more profit a retailer can earn.

16. When a business sells an item and collects a state sales tax on it, a current liability arises.

17. If a retailer sells goods for a total price of $200, which includes a 5% sales tax, the sales tax amount is $9.52.

18. During the month, a company sells goods for a total of $106,000 which includes sales taxes of $6,000; therefore, the company should recognize $100,000 in Sales Revenue and $6,000 in Sales Tax Expense.

19. Payroll taxes include the employer’s share of Social Security taxes as well as state and federal unemployment taxes.

20. Cash is received and unearned revenues are recognized before goods are delivered or services are rendered.

21. Metropolitan Symphony sells 200 season tickets for $40,000 that includes a five-concert season. The amount of Unearned Ticket Revenue after the third concert is $24,000.

22. The contractual interest rate is always equal to the market rate of interest on the date that bonds are issued.

23. Each bondholder may vote for the board of directors in proportion to the number of bonds held.

24. Bond interest paid by a corporation is an expense while dividends paid are not an expense of the corporation.

25. Generally, convertible bonds do not pay interest.

26. An unsecured bond is one that is issued against the general credit of the borrower.

27. Bonds are a form of interest-bearing notes payable.

28. Neither corporate bond interest nor dividends are deductible for tax purposes.

29. The face value is the amount of principal and interest due at the maturity date.

30. Convertible bonds are often called callable bonds.

31. A $150,000 bond with a quoted priced of 102 ¼ is sold for $153,375.

32. If a bond has a face amount of $1,000 and a contractual interest rate of 6 percent, then the interest paid annually will be $60.

33. A bond's current market value is equal to the present value of all future cash payments promised by the bond.

34. The board of directors may authorize more bonds than are actually issued.

35. The carrying value of bonds is calculated by adding the balance of the Discount on Bonds Payable account to the balance in the Bonds Payable account.

36. The carrying value of a bond is equal to the market price on the date of sale.

37. Total interest cost for a bond issued at a premium equals the total of the periodic interest payments added to the premium.

38. Total interest cost for a bond issued at a premium equals the total of the periodic interest payments minus the premium.

39. The calculation of interest to be paid each interest period in connection with a bond payable is not influenced by any premium or discount upon issuance.

40. If $150,000 face value bonds are issued at 102, the proceeds received will be $102,000.

41. If bonds sell at a premium, the interest expense recognized each year will be greater than the bond interest paid.

42. If the market rate of interest at the date of issuance of a bond is greater than the stated interest rate, the bond will be issued at a premium.

43. If a corporation issued bonds at an amount less than face value, it indicates that the corporation has a weak credit rating.

44. A corporation that issues bonds at a discount will recognize interest expense at a rate that is greater than the market rate of interest.

45. If bonds are issued at a discount, the issuing corporation will pay a principal amount less than the face amount of the bonds on the maturity date.

46. If bonds are issued at a premium, the carrying value of the bonds will be greater than the face value of the bonds for all periods prior to the bond maturity date.

47. If the market rate of interest is greater than the contractual rate of interest, bonds will sell at a discount.

48. If $180,000, 6%, bonds are issued on January 1 and pay interest annually, the amount of interest paid will be $10,800.

49. Material losses on bond redemption are reported as operating expenses on the income statement.

50. If $500,000 par value bonds with a carrying value of $476,000 are redeemed at 97, a loss on redemption will be recorded.

51. The classification of a liability as current or noncurrent is important because it may affect the evaluation of a company’s liquidity.

52. The debt to assets ratio measures the percentage of the total assets provided by creditors.

53. The times interest earned is computed by dividing net income by interest expense.

*54. The premium on bonds payable may be amortized by the straight-line method if the results obtained by its use do not materially differ from the results obtained by use of the effective-interest method.

*55. Discount on bonds payable may be amortized by the straight-line method if the results obtained by its use do not materially differ from the results obtained by use of the effective-interest method.

*56. If the straight-line method of amortization is used, the amount of unamortized premium on bonds payable will increase as the bonds approach maturity.

*57. If the straight-line method of amortization is used, the amount of unamortized premium on bonds payable will decrease as the bonds approach maturity.

*58. If the straight-line method of amortization is used, the amount of yearly interest expense will increase as the bonds approach maturity.

*59. When the effective-interest method of amortization is used, the amount of interest expense for a given period is calculated by multiplying the stated rate of interest by the bond’s carrying value at the beginning of the given period.

*60. Regardless of whether the straight-line method or the effective-interest method is used, the carrying value of a bond issued at a discount will decrease continually over the bond’s life.

*61. The effective-interest method produces a constant dollar amount of interest expense to be reported for each interest period.

*62. When there are material differences between the results of using the straight-line method and using the effective-interest method of amortization, the effective-interest method should be used.

*63. In a monthly mortgage payment, the same amount of interest expense is recognized each month.

*64. When a monthly mortgage payment is made and recorded, the debit to Mortgage Payable represents the reduction in the principal balance.

*65. An installment note calling for equal total payments each period will result in an interest portion that decreases in each successive period.

*66. An installment note calling for equal total payments each period will result in a principal portion that decreases in each successive period.

MULTIPLE CHOICE QUESTIONS

67. Liabilities are classified on the balance sheet as current or

a. deferred.

b. unearned.

c. long-term.

d. accrued.

68. 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.

69. A current liability is a debt that can reasonably be expected to be paid

a. within one year, or the operating cycle, whichever is longer.

b. between 6 months and 18 months.

c. out of currently recognized revenues.

d. out of cash currently on hand.

70. Which of the following most likely would be classified as a current liability?

a. Dividends payable

b. Bonds payable in 5 years

c. Three-year notes payable

d. Mortgage payable as a single payment in 10 years

71. Failure to record a liability will probably

a. result in an overstated net income.

b. result in overstated total liabilities and owner’s equity.

c. have no effect on net income.

d. result in overstated total assets.

72. Very often, failure to record a liability means failure to record a(n)

a. revenue.

b. asset conversion.

c. footnote.

d. expense.

73. Current liabilities are due

a. but not receivable for more than one year.

b. but not payable for more than one year.

c. and receivable within one year.

d. and payable within one year.

74. Liabilities are classified as current or long-term based on their

a. description.

b. payment terms.

c. due date.

d. amount.

75. Which of the following is not a current liability on December 31, 2025?

a. A Note Payable due December 31, 2026

b. An Accounts Payable due January 31, 2026

c. A lawsuit judgment to be decided on January 10, 2026

d. Accrued salaries payable related to work performed during 2025

76. With an interest-bearing note, the amount of assets received upon issuance of the note is generally

a. equal to the note's face value.

b. greater than the note's face value.

c. less than the note's face value.

d. equal to the note's maturity value.

77. Jackson County Bank agrees to lend the Ace Brick Company $500,000 on January 1. Ace Brick Company signs a $500,000, 6%, 9-month note. The entry made by Ace Brick Company on January 1 to record the proceeds and issuance of the note is

a. Interest Expense 22,500

Cash. 477,500

Notes Payable 500,000

b. Cash 500,000

Notes Payable 500,000

c. Cash 500,000

Interest Expense 22,500

Notes Payable 522,500

d. Cash 500,000

Interest Expense 22,500

Notes Payable 500,000

Interest Payable 22,500

78. Jackson County Bank agrees to lend the Ace Brick Company $500,000 on January 1. Ace Brick Company signs a $500,000, 6%, 9-month note. What is the adjusting entry required if Ace Brick Company prepares financial statements on June 30?

a. Interest Expense 15,000

Interest Payable 15,000

b. Interest Expense 15,000

Cash 15,000

c. Interest Payable 15,000

Cash 15,000

d. Interest Payable 15,000

Interest Expense 15,000

79. Jackson County Bank agrees to lend the Ace Brick Company $500,000 on January 1. Ace Brick signs a $500,000, 6%, 9-month note. What entry will Ace Brick make to pay off the note and interest at maturity assuming that interest has been accrued to September 30?

a. Notes Payable 522,500

Cash 522,500

b. Notes Payable 500,000

Interest Payable 22,500

Cash 522,500

c. Interest Expense 22,500

Notes Payable 500,000

Cash 522,500

d. Interest Payable 15,000

Notes Payable 500,000

Interest Expense 7,500

Cash 522,500

80. Jackson County Bank agrees to lend A1 Builders Company $400,000 on January 1. A1 Builders signs a $400,000, 6%, 6-month note. The entry made by A1 Builders on January 1 to record the proceeds and issuance of the note is

a. Interest Expense 6,000

Cash. 194,000

Notes Payable 400,000

b. Cash 400,000

Notes Payable 400,000

c. Cash 400,000

Interest Expense 12,000

Notes Payable 412,000

d. Cash 400,000

Interest Expense 12,000

Notes Payable 400,000

Interest Payable 12,000

81. Jackson County Bank agrees to lend A1 Builders Company $400,000 on January 1. A1 Builders signs a $400,000, 6%, 6-month note. What is the adjusting entry required if A1 Builders prepares financial statements on March 30?

a. Interest Expense 12,000

Interest Payable 12,000

b. Interest Expense 12,000

Cash 12,000

c. Interest Expense 6,000

Interest Payable 6,000

d. Interest Payable 6,000

Interest Expense 6,000

82. Jackson County Bank agrees to lend A1 Builders Company $400,000 on January 1. A1 Builders signs a $400,000, 6%, 6-month note. What entry will A1 Builders make to pay off the note and interest at maturity assuming that interest has been accrued to June 30?

a. Notes Payable 412,000

Cash 412,000

b. Notes Payable 400,000

Interest Payable 12,000

Cash 412,000

c. Interest Expense 12,000

Notes Payable 400,000

Cash 412,000

d. Interest Payable 6,000

Notes Payable 400,000

Interest Expense 6,000

Cash 412,000

83. As interest is recorded on an interest-bearing note, the Interest Expense account is

a. increased; the Notes Payable account is increased.

b. increased; the Notes Payable account is decreased.

c. increased; the Interest Payable account is increased.

d. decreased; the Interest Payable account is increased.

84. On October 1, Acme Painting Service borrows $150,000 from Jackson County Bank on a 3-month, $150,000, 4% note. What entry must Acme Painting Service make on December 31 before financial statements are prepared?

a. Interest Payable 1,500

Interest Expense 1,500

b. Interest Expense 6,000

Interest Payable 6,000

c. Interest Expense 1,500

Interest Payable 1,500

d. Interest Expense 1,500

Notes Payable 1,500

85. On October 1, Acme Painting Service borrows $150,000 from National Bank on a 3-month, $150,000, 4% note. The entry by Acme Painting Service to record payment of the note and accrued interest on January 1 is

a. Notes Payable 151,500

Cash 151,500

b. Notes Payable 150,000

Interest Payable 1,500

Cash 151,500

c. Notes Payable 150,000

Interest Payable 6,000

Cash 156,000

d. Notes Payable 150,000

Interest Expense 1,500

Cash 151,500

86. The interest charged on a $300,000 note payable, at the rate of 6%, on a 90-day note would be

a. $18,000.

b. $9,000.

c. $4,500.

d. $1,500.

87. The interest charged on a $350,000 note payable, at the rate of 6%, on a 60-day note would be

a. $21,000.

b. $10,500.

c. $5,250.

d. $3,500.

88. The interest charged on a $350,000 note payable at the rate of 6% for a year would be

a. $21,000.

b. $10,500.

c. $5,250.

d. $1,750.

89. The interest charged on a $90,000 note payable at the rate of 6% on a 90-day note would be

a. $5,400.

b. $2,700.

c. $1,350.

d. $900.

90. The interest charged on a $90,000 note payable at the rate of 6% on a 60-day note would be

a. $5,400.

b. $2,700.

c. $1,350.

d. $900.

91. Interest expense on an interest-bearing note is

a. always equal to zero.

b. accrued over the life of the note.

c. only recorded at the time the note is issued.

d. only recorded at maturity when the note is paid.

92. Sales taxes collected by a retailer are recorded by

a. crediting Sales Tax Revenue.

b. debiting Sales Tax Expense.

c. crediting Sales Taxes Payable.

d. debiting Sales Taxes Payable.

93. Unearned Rent Revenue is

a. a contra account to Rent Revenue.

b. a revenue account.

c. reported as a current liability.

d. debited when rent is received in advance.

94. The amount of sales tax collected by a retail store when making sales is

a. a miscellaneous revenue for the store.

b. a current liability.

c. not recorded because it is a tax paid by the customer.

d. recorded as an operating expense.

95. A company receives $264, of which $24 is for sales tax. The journal entry to record the sale would include a

a. debit to Sales Taxes Expense for $24.

b. credit to Sales Taxes Payable for $24.

c. debit to Sales Revenue for $264.

d. debit to Cash for $240.

96. A company receives $348, of which $28 is for sales tax. The journal entry to record the sale would include a

a debit to Sales Taxes Expense for $28.

b. debit to Sales Taxes Payable for $28.

c. debit to Sales Revenue for $348.

d. debit to Cash for $348.

97. A retail store credited the Sales Revenue 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 Revenue account amounted to $294,000, what is the amount of the sales taxes owed to the tax agency?

a. $280,000

b. $294,000

c. $14,700

d. $14,000

98. A retail store credited the Sales Revenue 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 Revenue account amounted to $630,000, what is the amount of the sales taxes owed to the tax agency?

a. $600,000

b. $630,000

c. $31,500

d. $30,000

99. The current portion of long-term debt should

a. be paid immediately.

b. be reclassified as a current liability.

c. be classified as a long-term liability.

d. not be separated from the long-term portion of debt.

100. On January 1, 2025, A1 Service Company, a calendar-year company, issued $2,000,000 of notes payable, of which $500,000 is due on January 1 for each of the next four years. The proper balance sheet presentation on December 31, 2025, is

a. Current liabilities, $2,000,000.

b. Long-term debt , $2,000,000.

c. Current liabilities, $500,000; Long-term Debt, $1,000,000.

d. Current liabilities, $500,000; Long-term Debt, $1,500,000.

101. On January 1, 2025, Ace Beauty Supply Company, a calendar-year company, issued $900,000 of notes payable, of which $225,000 is due on January 1 for each of the next four years. The proper balance sheet presentation on December 31, 2025 is

a. Current liabilities, $900,000.

b. Long-term debt, $900,000.

c. Current liabilities, $225,000; Long-term Debt, $675,000.

d. Current liabilities, $675,000; Long-term Debt, $225,000.

102. Sales taxes collected by a retailer from a customer are expenses

a. of the retailer.

b. of the customers.

c. of the government.

d. that are not recognized by the retailer until they are submitted to the government.

103. When Old Navy collects sales taxes, it is acting as an agent for the

a. wholesaler.

b. customer.

c. taxing authority.

d. chamber of commerce.

104. Sales taxes collected by Target are reported as

a. contingent liabilities.

b. revenues.

c. expenses.

d. current liabilities.

105. A cash register reading shows cash sales of $8,000 and sales taxes of $400. The journal entry to record this information is

a. Cash .8,000

Sales Revenue 8,000

b. Cash .8,400

Sales Tax Revenue 400

Sales Revenue 8,000

c. Cash .8,000

Sales Tax Expense . 400

Sales Revenue 8,400

d. Cash .8,400

Sales Revenue 8,000

Sales Taxes Payable 400

106. A1 Pharmacy has collected $900 in sales taxes during March. If sales taxes must be remitted to the state government monthly, what entry will A1 Pharmacy make to show the March remittance?

a. Sales Tax Expense .900

Cash 900

b. Sales Taxes Payable .900

Cash 900

c. Sales Tax Expense .900

Sales Taxes Payable 900

d. No entry required.

107. A cash register reading shows cash sales of $3,000 and sales taxes of $200. The journal entry to record this information is

a. Cash .3,200

Sales Revenue 3,200

b. Cash .3,200

Sales Tax Payable 200

Sales Revenue 3,000

c. Cash .3,000

Sales Tax Expense . 200

Sales Revenue 3,200

d. Cash .3,200

Sales Revenue 3,000

Sales Tax Revenue 200

108. Acme Bookstore has collected $950 in sales taxes during April. If sales taxes must be remitted to the state government monthly, what entry will Acme Bookstore make to show the April remittance?

a. Sales Tax Expense .950

Cash 950

b. Sales Taxes Payable .950

Cash 950

c. Sales Tax Expense .950

Sales Taxes Payable 950

d. No entry required.

109. Ace Service Corp. does not ring up sales taxes separately on the cash register. Total receipts for February amounted to $38,160. If the sales tax rate is 6%, what amount must be remitted to the state for February's sales taxes?

a. $2,290

b. $2,160

c. $2,152

d. It cannot be determined.

110. Acme Dollar Store does not ring up sales taxes separately on the cash register. Total receipts for October amounted to $36,750. If the sales tax rate is 5%, what amount must be remitted to the state for October's sales taxes?

a. $1,750

b. $1,838

c. $88

d. It cannot be determined.

111. Katy’s Boutique has total receipts for the month of $32,340 including sales taxes. If the sales tax rate is 5%, what are Katy's sales for the month?

a. $30,724

b. $30,800

c. $32,340

d. It cannot be determined.

112. Ryan's Salon has total receipts for the month of $40,280 including sales taxes. If the sales tax rate is 6%, what are Ryan's sales for the month?

a. $37,864.40

b. $42,697.60

c. $38,000.00

d. It cannot be determined.

113. The following totals for the month of April were taken from the payroll records of A1 Lawn Service Company.

Salaries $120,000

FICA taxes withheld 9,180

Income taxes withheld 25,000

Medical insurance deductions 4,500

Federal unemployment taxes 320

State unemployment taxes 2,160

The journal entry to record the monthly payroll on April 30 would include a

a. debit to Salaries and Wages Expense for $120,000.

b. credit to Salaries and Wages Payable for $120,000.

c. debit to Salaries and Wages Payable for $120,000.

d. debit to Salaries and Wages Expense for $81,320.

114. The following totals for the month of April were taken from the payroll records of A1 Lawn Service Company.

Salaries $120,000

FICA taxes withheld 9,180

Income taxes withheld 25,000

Medical insurance deductions 4,500

Federal unemployment taxes 320

State unemployment taxes 2,160

The entry to record the payment of net payroll would include a

a. debit to Salaries and Wages Payable for $79,160.

b. debit to Salaries and Wages Payable for $81,320.

c. debit to Salaries and Wages Payable for $72,140.

d. credit to Cash for $90,500.

115. The following totals for the month of April were taken from the payroll records of A1 Lawn Service Company.

Salaries $120,000

FICA taxes withheld 9,180

Income taxes withheld 25,000

Medical insurance deductions 4,500

Federal unemployment taxes 320

State unemployment taxes 2,160

The entry to record accrual of employer’s payroll taxes would include a

a. debit to Payroll Tax Expense for $2,480.

b. debit to Payroll Tax Expense for $11,660.

c. credit to FICA Taxes Payable for $18,360.

d. credit to Payroll Tax Expense for $2,480.

116. The following totals for the month of April were taken from the payroll records of A1 Lawn Service Company.

Salaries $120,000

FICA taxes withheld 9,180

Income taxes withheld 25,000

Medical insurance deductions 4,500

Federal unemployment taxes 320

State unemployment taxes 2,160

The entry to record the accrual of federal unemployment tax would include a

a. credit to Federal Unemployment Taxes Payable for $320.

b. debit to Salaries and Wages Payable for $320.

c. credit to Payroll Tax Expense for $320.

d. debit to Federal Unemployment Taxes Payable for $320.

117. Suppose that Verizon issued a five-year interest-bearing note payable for $300,000 on January 1, 2024. Each January the company is required to pay $60,000 on the note. How will this note be reported on the December 31, 2025 balance sheet?

a. Long-term debt, $300,000

b. Long-term debt, $240,000

c. Long-term debt, $180,000; Long-term Debt due within one year, $60,000

d. Long-term debt of $240,000; Long-term Debt due within one year, $60,000

118. The following totals for the month of April were taken from the payroll records of Ace Pet Supply Company.

Salaries $90,000

FICA taxes withheld 6,885

Income taxes withheld 19,800

Medical insurance deductions 3,600

Federal unemployment taxes 720

State unemployment taxes 4,500

The journal entry to record the monthly payroll on April 30 would include a

a. debit to Salaries and Wages Expense for $90,000.

b. credit to Salaries and Wages Payable for $90,000.

c. debit to Salaries and Wages Payable for $90,000.

d. debit to Salaries and Wages Expense for $59,715.

119. The following totals for the month of April were taken from the payroll records of Ace Pet Supply Company.

Salaries $90,000

FICA taxes withheld 6,885

Income taxes withheld 19,800

Medical insurance deductions 3,600

Federal unemployment taxes 720

State unemployment taxes 4,500

The entry to record the payment of net payroll would include a

a. debit to Salaries and Wages Payable for $54,495.

b. debit to Salaries and Wages Payable for $59,715.

c. debit to Salaries and Wages Payable for $55,215.

d. credit to Cash for $55,215.

120. The following totals for the month of April were taken from the payroll records of Ace Pet Supply Company.

Salaries $90,000

FICA taxes withheld 6,885

Income taxes withheld 19,800

Medical insurance deductions 3,600

Federal unemployment taxes 720

State unemployment taxes 4,500

The entry to record accrual of employer’s payroll taxes would include a

a. debit to Payroll Tax Expense for $12,105.

b. credit to Payroll Tax Expense for $12,105.

c. credit to FICA Taxes Payable for $5,220.

d. credit to Payroll Tax Expense for $5,220.

121. The following totals for the month of April were taken from the payroll records of Ace Pet Supply Company.

Salaries $90,000

FICA taxes withheld 6,885

Income taxes withheld 19,800

Medical insurance deductions 3,600

Federal unemployment taxes 720

State unemployment taxes 4,500

The entry to record the accrual of federal unemployment tax would include a

a. credit to Federal Unemployment Taxes Payable for $720.

b. credit to Federal Unemployment Taxes Expense for $720.

c. credit to Payroll Tax Expense for $720.

d. debit to Federal Unemployment Taxes Payable for $720.

122. Two sisters operate an inn on the coast of North Carolina. As customers make reservations they are required to pay cash in advance equal to one-half of the rate for their stay. How should the sisters account for the cash received as reservations are made?

a. Cash

Unearned Service Revenue

b. Cash

Service Revenue

c. Unearned Service Revenue

Service Revenue

d. Cash

Sales Revenue

123. Katy Perry has a large consulting practice. New clients are required to pay one-half of the consulting fees up front. The balance is paid at the conclusion of the consultation. How does Perry account for the cash received at the end of the engagement?

a. Cash

Unearned Service Revenue

b. Cash

Unearned Service Revenue

Service Revenue

c. Prepaid Service Revenue

Service Revenue

d. No entry is required when the engagement is concluded.

124. A1 Media Company typically sells subscriptions on an annual basis and publishes six times a year. The magazine sells 90,000 subscriptions in January at $10 each. What entry is made in January to record the sale of the subscriptions?

a. Subscriptions Receivable .900,000

Subscription Revenue . 900,000

b. Cash .900,000

Unearned Subscription Revenue . 900,000

c. Subscriptions Receivable .150,000

Unearned Subscription Revenue . 150,000

d. Prepaid Subscriptions .900,000

Cash . 900,000

125. Ace Media Company typically sells subscriptions on an annual basis and publishes eight times a year. The magazine sells 60,000 subscriptions in January at $10 each. What entry is made in January to record the sale of the subscriptions?

a. Subscriptions Receivable .600,000

Subscription Revenue . 600,000

b. Cash .600,000

Unearned Subscription Revenue . 600,000

c. Subscriptions Receivable . 75,000

Unearned Subscription Revenue . 75,000

d. Prepaid Subscriptions .600,000

Cash . 600,000

126. Ace Retailers operates in Florida and collects sales taxes from customers on all

purchases. How should these sales taxes be reported when collected?

a. As an expense on the income statement

b. As sales revenue along with the selling price of the items sold

c. As unearned revenues

d. As a current liability until paid to the State of Florida

127. Which of the following amounts are deducted from employees’ paychecks?

1. FICA Taxes Payable and State Unemployment Taxes Payable
2. Federal Unemployment Taxes Payable and State Unemployment Taxes Payable
3. Federal Unemployment Taxes Payable and FICA Taxes Payable
4. Federal Income Taxes Payable and FICA Taxes Payable

128. A1 Industries has total sales of $143,000 and sales taxes collected totaling $10,010 based on a 7% tax rate during June. The company submitted $5,600 of the taxes to the State before the end of June. Which one of the following will be reported on A1’s financial statements at the end of June?

a. Sales Tax Expense for $10,010

b. Sales for $153,010

c. Sales Taxes Payable for $4,410

d. Net sales for $147,410

129. Current liabilities are obligations that are reasonably expected to be paid from

Existing Creation of Other

Current Assets Current Liabilities

a. No No

b. Yes Yes

c. Yes No

d. No Yes

130. On October 31, 2025, Acme Service Company issued a $5,000, 8%, 6-month note to Jackson County Bank. Acme accrued interest at December 31, 2025. How much will Acme credit to cash to record the payment of the note at maturity?

a. $5,000

b. $7,400

c. $5,200

d. $5,133

131. To what is the current market value of bonds equal when determining their issue price?

a. The present value of the bonds future cash flows

b. The sum of the future interest payments, plus the principal payment when the bonds mature

c. The difference between the face value of the bonds and the contractual interest rate

d. The cash that will be paid to the investor when the bonds mature

132. From the standpoint of the issuing company, a disadvantage of using bonds as a means of long-term financing is that

a. bond interest is deductible for tax purposes.

b. interest must be paid on a periodic basis regardless of earnings.

c. income to stockholders may increase as a result of trading on the equity.

d. the bondholders do not have voting rights.

133. If a corporation issued $9,000,000 in bonds which pay 5% annual interest, what is the annual net cash cost of this borrowing if the income tax rate is 30%?

a. $4,500,000

b. $135,000

c. $450,000

d. $315,000

134. Secured bonds are bonds that

a. are in the possession of a bank.

b. can be converted into common stock.

c. have specific assets of the issuer pledged as collateral.

d. mature in installments.

135. A legal document that indicates the name of the issuer, the face value of the bond and other data is called

a. a bond certificate.

b. a bond debenture.

c. trading on the equity.

d. a convertible bond.

136. Stockholders of a company may be reluctant to finance expansion by issuing more equity because

a. leveraging with debt is always a better idea.

b. their earnings per share may decrease.

c. the price of the stock will automatically increase.

d. dividends must be paid on a periodic basis.

137. Which of the following is not an advantage of issuing bonds instead of common stock?

a. Stockholder control is not affected

b. Earnings per share on common stock may be lower

c. Tax savings result

138. Bonds that are secured by real estate are termed

a. mortgage bonds.

b. serial bonds.

c. debentures.

d. convertible bonds.

139. Bonds that may be exchanged for common stock at the option of the bondholders are called

a. options.

b. stock bonds.

c. convertible bonds.

d. callable bonds.

140. Bonds that are subject to retirement at a stated dollar amount prior to maturity at the option of the issuer are called

a. callable bonds.

b. early retirement bonds.

c. options.

d. debentures.

141. Bonds that are issued against the general credit of the borrower are called

a. callable bonds.

b. debenture bonds.

c. secured bonds.

d. term bonds.

142. Corporations are granted the power to issue bonds through

a. tax laws.

b. state laws.

c. federal security laws.

d. bond debentures.

143. Bonds are not always categorized as

a. callable or convertible.

b. term or serial.

c. secured or unsecured.

d. secured or debenture.

144. Which of the following statements concerning bonds is false?

a. Bonds are generally sold through an investment company.

b. The bond indenture is prepared after the bonds are printed.

c. The bond indenture and bond certificate are separate documents.

d. The trustee keeps records of each bondholder.

145. The contractual rate of interest is usually stated as a(n)

a. monthly rate.

b. daily rate.

c. semiannual rate.

d. annual rate.

146. When authorizing bonds to be issued, the board of directors does not specify the

a. total number of bonds authorized to be sold.

b. contractual interest rate.

c. selling price.

d. total face value of the bonds.

147. Bonds with a face value of $500,000 and a quoted price of 102¼ have a selling price of

a. $601,125.

b. $510,125.

c. $510,013.

d. $511,250.

148. Bonds with a face value of $500,000 and a quoted price of 97¼ have a selling price of

a. $486,250.

b. $485,125.

c. $485,013.

d. $487,500.

149. Bonds with a face value of $600,000 and a quoted price of 104¼ have a selling price of

a. $625,500.

b. $624,150.

c. $602,550.

d. $624,000.

150. Bonds with a face value of $600,000 and a quoted price of 98½ have a selling price of

a. $589,500.

b. $588,300.

c. $588,030.

d. $591,000.

151. The present value of a bond is also known as its

a. face value.

b. market price.

c. future value.

d. deferred value.

152. All of the following statements regarding convertible bonds are true except

a. if the market price of common stock increases substantially, bondholders with convertible bonds benefit.

b. convertible bonds can be converted into common stock at the option of the issuing company.

c. bondholders with convertible bonds receive interest on the bonds until conversion.

d. convertible bonds sell at a higher price and pay a lower rate of interest than those without the conversion option.

153. The contractual interest rate on a bond is often referred to as the

a. callable rate.

b. the maturity rate.

c. market rate.

d. stated rate.

154. Suppose that Target issued bonds that are subject to retirement at a stated dollar amount prior to maturity at the option of the issuer. What are these bonds called?

a. Convertible bonds

b. Early retirement bonds.

c. Callable bonds

d. Secured bonds

155. If the market interest rate for a bond is higher than the stated interest rate, the bond will sell at

a. a premium.

b. a discount.

c. par.

d. either a discount or premium.

156. A1 Pharmaceutical issued bonds at a premium. Which of the statements below is true of the premium?

a. It will increase bond interest expense throughout the bond term.

b. It represents a reduction in the cost of borrowing.

c. It is an extra payment the bond issuer must pay to the bond investors.

d. It is a reduction of the interest payments the bond issuer must pay to bond investors.

157. Which one of the following is not one of the functions that impact the market value of bonds?

a. The length of time until the amounts are received

b. The market interest rate

c. The dollar amounts to be received

d. The method of amortizing the bond interest

158. If the market rate of interest is greater than the contractual rate of interest, bonds will sell

a. at a premium.

b. at face value.

c. at a discount.

d. only after the stated rate of interest is increased.

159. The interest expense recorded on an interest payment date is increased

a. by the amortization of premium on bonds payable.

b. by the amortization of discount on bonds payable.

c. only if the bonds were sold at face value.

d. only if the market rate of interest is less than the stated rate of interest on that date.

160. What does the balance in the Discount on Bonds Payable account represent?

a. Additional interest cost associated with the issuance of debt

b. A reduction of interest cost associated with the issuance of debt

c. A reduction of the maturity value of the bonds

d. An increase of the maturity value of the bonds

161. The market rate of interest is higher than the stated rate of interest on bonds issued by Acme, Inc. At what amount will the bonds be issued?

a. At a premium

c. At an amount lower than face value

d. At an amount higher than face value

162. If the market rate of interest is 10%, a $10,000, 12%, 10-year bond that pays interest annually would sell at an amount

a. less than face value.

b. equal to face value.

c. greater than face value.

d. that cannot be determined.

163. If the market rate of interest is lower than the contractual interest rate, the bonds will sell at

a. face value.

b. a premium.

c. a discount.

d. an unknown amount.

164. If bonds are issued at a premium, the stated interest rate is

a. higher than the market rate of interest.

b. lower than the market rate of interest.

c. too low to attract investors.

d. adjusted to a higher rate of interest.

165. The present value of a $10,000, 5-year bond, will be less than $10,000 if the

a. contractual rate of interest is less than the market rate of interest.

b. contractual rate of interest is greater than the market rate of interest.

c. bond is convertible.

d. contractual rate of interest is equal to the market rate of interest.

166. The market value (present value) of a bond is a function of all of the following except the

a. dollar amounts to be received.

b. maturity date.

c. market interest rate.

d. type of bonds.

167. A1 Corporation issues 900, 10-year, 8%, $1,000 bonds dated January 1, 2025 at 96. The journal entry to record the issuance will include a

a. debit to Cash of $900,000.

b. credit to Discount on Bonds Payable for $36,000.

c. credit to Bonds Payable for $864,000.

d. debit to Cash for $864,000.

168. Suppose that Tesla issues 5,000, 10-year, 8%, $1,000 bonds dated January 1, 2025 at 97. The journal entry to record the issuance of the bonds will include a

a. debit to Cash of $5,000,000.

b. debit to Discount on Bonds Payable for $150,000.

c. credit to Bonds Payable for $4,850,000.

d. credit to Cash for $4,850,000.

169. Suppose that Verizon issues 5,000, 10-year, 8%, $1,000 bonds dated January 1, 2025 at 103. The journal entry to record the sales of the bonds will include

a. debit to Cash of $5,000,000.

b. debit to Premium on Bonds Payable for $150,000.

c. credit to Bonds Payable for $5,000,000.

d. credit to Cash for $5,150,000.

170. The market rate of interest is often called the

a. stated rate.

b. effective rate.

c. coupon rate.

d. contractual rate.

171. If bonds are issued at a discount, it means that the

a. financial strength of the issuer is suspect.

b. market interest rate is higher than the contractual interest rate.

c. market interest rate is lower than the contractual interest rate.

d. bondholder will receive effectively less interest than the contractual rate of interest.

172. Selling the bonds at a premium has the effect of

a. causing the total cost of borrowing to be higher than the bond interest paid.

b. causing the total cost of borrowing to be lower than the bond interest paid.

c. raising the effective interest rate above the state interest rate.

d. increasing the amount of cash paid for interest every 6 months.

173. When bonds are issued at a premium, the total interest cost of the bonds over the life of the bonds is equal to the amount of

a. interest paid over the life of the bond.

b. interest paid over the life of the bond plus the amount of premium at sale point.

c. interest paid over the life of the bond minus the amount of premium at sale point.

d. premium at the sale point.

174. The statement "Bond prices vary inversely with changes in the market rate of interest" means that if the

a. market rate of interest increases, the contractual interest rate will decrease.

b. contractual interest rate increases, then bond prices will go down.

c. market rate of interest decreases, then bond prices will go up.

d. contractual interest rate increases, the market rate of interest will decrease.

175. The carrying value of bonds will equal the market price

a. at the close of every trading day.

b. at the end of the fiscal period.

c. on the date of issuance.

d. every six months on the date interest is paid.

176. Over the term of the bonds, the balance in the Discount on Bonds Payable account will

a. fluctuate up and down if the market is volatile.

b. decrease.

c. increase.

d. be unaffected until the bonds mature.

177. The sale of bonds above face value

a. is a rare occurrence.

b. will cause the total cost of borrowing to be less than the bond interest paid.

c. will cause the total cost of borrowing to be more than the bond interest paid.

d. will have no net effect on interest expense by the time the bonds mature.

178. In the balance sheet, the account Premium on Bonds Payable is

a. added to bonds payable.

b. deducted from bonds payable.

c. classified as a stockholders' equity account.

d. classified as a revenue account.

179. In the balance sheet, the account Discount on Bonds Payable is

a. added to bonds payable.

b. deducted from bonds payable.

c. classified as a stockholders' equity account.

d. classified as a revenue account.

180. Bond discount should be amortized to comply with

a. the historical cost principle.

b. the expense recognition principle.

c. the revenue recognition principle.

d. conservatism.

181. Five thousand bonds with a face value of $1,000 each, are sold at 102. The entry to record the issuance is

a. Cash .5,100,000

Bonds Payable . 5,100,000

b. Cash .5,000,000

Premium on Bonds Payable . 100,000

Bonds Payable . 5,100,000

c. Cash .5,100,000

Premium on Bonds Payable . 100,000

Bonds Payable . 5,000,000

d. Cash .5,100,000

Discount on Bonds Payable . 100,000

Bonds Payable . 5,000,000

182. Five thousand bonds with a face value of $1,000 each, are sold at 97. The entry to record the issuance is

a. Cash .4,850,000

Bonds Payable . 4,850,000

b. Cash .4,850,000

Discount on Bonds Payable . 150,000

Bonds Payable . 5,000,000

c. Cash .4,850,000

Premium on Bonds Payable . 150,000

Bonds Payable . 5,000,000

d. Cash .5,000,000

Discount on Bonds Payable . 150,000

Bonds Payable . 4,850,000

183. The journal entry to record the issuance of bonds at a discount will include a

a. debit to Cash for the face amount of the bonds.

b. debit to Cash for the face amount of the bonds plus the amount of the discount.

c. debit to Cash for the face amount of the bonds minus the amount of the discount.

d. credit to Cash for the face amount of the bonds.

184. If bonds have been issued at a discount, then over the life of the bonds the

a. carrying value of the bonds will decrease.

b. carrying value of the bonds will increase.

c. interest expense will increase if the discount is being amortized on a straight-line basis.

d. unamortized discount will increase.

185. A1 Service Company has $2,000,000 of bonds outstanding. The unamortized premium is $28,800. If the company redeemed the bonds at 101, what would be the gain or loss on the redemption?

a. $8,800 gain

b. $8,800 loss

c. $20,000 gain

d. $20,000 loss

186. The current carrying value of Ace Auto Supply Company’s $800,000 face value bonds is $797,000. If the bonds are retired at 102, what would be the amount Ace would pay its bondholders?

a. $797,000

b. $800,000

c. $804,000

d. $816,000

187. Acme Marine has $3,500,000 of bonds outstanding. The unamortized premium is $50,400. If the company redeemed the bonds at 101, what would be the gain or loss on the redemption?

a. $15,400 gain

b. $15,400 loss

c. $35,000 gain

d. $35,000 loss

188. Suppose that the current carrying value of Old Navy’s $1,800,000 face value bonds is $1,793,200. If the bonds are retired at 102, what would be the amount Old Navy would pay its bondholders?

a. $1,793,200

b. $1,800,000

c. $1,804,000

d. $1,836,000

189. Suppose that Ford Motor Corporation retires its $800,000 face value bonds at 105 on January 1, following the payment of annual interest. The carrying value of the bonds at the redemption date is $829,960. The entry to record the redemption will include a

a. credit of $29,960 to Loss on Bond Redemption.

b. debit of $29,960 to Premium on Bonds Payable.

c. credit of $10,040 to Gain on Bond Redemption.

d. debit of $40,000 to Premium on Bonds Payable.

190. When bonds are retired before maturity,

a. only a loss on redemption can be recorded.

b. only a gain on redemption can be recorded.

c. either a gain or a loss on redemption can be recorded.

d. neither a gain nor a loss on redemption can be recorded.

191. When bonds are retired at maturity,

a. only a loss on redemption can be recorded.

b. only a gain on redemption can be recorded.

c. either a gain or a loss on redemption can be recorded.

d. neither a gain nor a loss on redemption can be recorded.

192. A $1,000,000 bond was retired at 98 when the carrying value of the bond was $985,000. The entry to record the retirement would include a

a. gain on bond redemption of $15,000.

b. loss on bond redemption of $5,000.

c. loss on bond redemption of $15,000.

d. gain on bond redemption of $5,000.

193. A $900,000 bond was retired at 103 when the carrying value of the bond was $933,000. The entry to record the retirement would include a

a. gain on bond redemption of $27,000.

b. loss on bond redemption of $6,000.

c. loss on bond redemption of $27,000.

d. gain on bond redemption of $6,000.

194. An $800,000 bond was retired at 98 when the carrying value of the bond was $824,000. The entry to record the retirement would include a

a. gain on bond redemption of $24,000.

b. loss on bond redemption of $24,000.

c. loss on bond redemption of $40,000.

d. gain on bond redemption of $40,000.

195. Suppose that Patagonia issued bonds that had the following data associated with them:

Interest to be paid is $40,000.

Interest expense to be recorded is $45,000.

Which of the following characteristics is true?

a. The bonds are sold at a premium.

b. When recording the interest expense, the amortization will decrease the bond carrying value.

c. The difference between the interest expense and the interest to be paid is the bond's par value.

d. When recording the interest expense, the amortization will increase the bond carrying value.

196. A $1,000,000 bond was issued at 98 and repaid at maturity. The entry to record the retirement would include a

a. a credit to Cash for $980,000.

b. a debit to Bonds Payable for $1,000,000.

c. a debit to Interest Expense for $20,000.

d. a debit to Discount on Bonds Payable for $20,000.

197. Acme Company retired at maturity a $1,000,000 bond that was originally issued at 102. The entry to record the retirement would include a

a. a credit to Cash for $1,000,000.

b. a debit to Bonds Payable for $1,020,000.

c. a credit to Interest Expense for $20,000.

d. a debit to Premium on Bonds Payable for $20,000.

198. All of the following are true regarding financial statement analysis ratios associated with liabilities except:

a. A high times interest earned ratio indicates that a company is more likely to meet interest payments as scheduled.

b. High liquidity ratios mean that lines of credit should be high to compensate.

c. If a company's current ratio is lower than the industry average, it may lack liquidity.

d. The debt to assets ratio shows the degree to which the company has financed with debt versus equity.

199. From an accounting standpoint, all of the following are contingencies that must be evaluated for reporting purposes except

a. product warranties.

b. general business risks.

c. money-back guarantees for products.

d. environmental cleanup obligations.

200. A measure of a company’s solvency is the

a. acid-test ratio.

b. current ratio.

c. times interest earned.

d. asset turnover ratio.

201. The times interest earned is computed by dividing

a. net income by interest expense.

b. income before income taxes by interest expense.

c. income before interest expense by interest expense.

d. income before interest expense and income taxes by interest expense.

202. In a recent year, Acme Discount Retail Corporation had net income of $120,000, interest expense of $20,000, and income tax expense of $30,000. What was Acme’s times interest earned for the year?

a. 6.00

b. 7.00

c. 7.50

d. 8.50

203. Which statement is true concerning off-balance sheet financing?

a. It allows a company to overstate its debt to assets ratio.

b. It is an intentional effort by a company to structure its financing arrangements to avoid showing liabilities on its balance sheet.

c. It is a violation of GAAP and causes total liabilities to be understated.

d. It occurs when companies report liabilities on the income statement as expenses rather than liabilities on the balance sheet.

204. Liquidity ratios measure a company's

a. operating cycle.

b. revenue-producing ability.

c. short-term debt paying ability.

d. long-range solvency.

205. The relationship between current assets and current liabilities is

a. useful in determining income.

b. useful in evaluating a company's liquidity.

c. called the matching principle.

d. useful in determining the amount of a company's long-term debt.

206. In 2025, A1 Lawn Service had net income of $155,000, interest expense of $30,000, and income tax expense of $40,000. What was A1’s times interest earned for the year?

a. 7.50

b. 5.17

c. 6.17

d. 6.50

207. Failure to record a liability will probably

a. understate net income.

b. result in overstated total liabilities and owner’s equity.

c. understate the debt to assets ratio.

d. make a company appear to be less solvent.

208. In 2025, Acme Pet Supply Company had net income of $150,000, interest expense of $30,000, and a times interest earned ratio of 7. What was Acme’s income before taxes for the year?

a. $240,000

b. $210,000

c. $180,000

209. The adjusted trial balance for A1 Corp. at the end of the current year contained the following accounts:

5-year Bonds Payable 8% $1,600,000

Bond Interest Payable 50,000

Premium on Bonds Payable 100,000

Notes Payable (3 mo.) 40,000

Notes Payable (5 yr.) 165,000

Mortgage Payable ($15,000 due currently) 200,000

Salaries and Wages Payable 18,000

Taxes Payable (due 3/15 of next yr) 25,000

The total long-term liabilities reported on the balance sheet are

a. $1,965,000

b. $1,950,000

c. $2,065,000

d. $2,050,000

210. The adjusted trial balance for Acme Corp. at the end of the current year contained the following accounts:

5-year Bonds Payable 4% $1,500,000

Bond Interest Payable 50,000

Discount on Bonds Payable 50,000

Accounts Payable 32,000

Notes Payable (6 mo.) 50,000

Notes Payable (3 yr.) 175,000

Mortgage Payable ($30,000 due currently) 600,000

Salaries and Wages Payable 20,000

Acme’s total long-term liabilities reported on the balance sheet are

a. $2,195,000

b. $2,065,000

c. $2,075,000

d. $2,095,000

211. The 2025 financial statements of A2 Co. contain the following selected data (in millions):

Current assets $ 90

Total assets 160

Current liabilities 45

Total liabilities 72

Cash 8

Interest expense 5

Income taxes 10

Net income 16

The company’s debt to assets ratio is

a. 45.0%.

b. 50.0%.

c. 2.22%.

d. 6.2 times.

1. $1,000,000*0.05 = $50,000
2. $20,000/5 = $4,000
3. $50,000 + $4,000 = $54,000
4. $20,000 - $4,000 = $16,000
5. $980,000 + $4,000 = $984,000

*Be. 274

A1 Discount Supply Company issued $700,000, 10%, 10-year bonds on January 1, 2025 at 105. Interest is payable annually on December 31. A1 uses the effective-interest method of amortization and has a calendar year-end and the bonds were issued for an effective interest rate of 8%.

Instructions

Prepare all journal entries made in 2025 related to the bond issue.

Ex. 276

Acme Company has the following selected accounts after posting adjusting entries:

Accounts Payable $ 55,000

Notes Payable, 3-month 90,000

Accumulated Depreciation—Equipment 14,000

Notes Payable, 5-year, 3% 75,000

Payroll Taxes Expense 6,000

Interest Payable 5,000

Mortgage Payable 180,000

Sales Taxes Payable 23,000

Instructions

(a) Prepare the current liability section of Acme Company's balance sheet, assuming $12,000 of the mortgage is payable next year.

(b) Comment on Acme’s liquidity, assuming total current assets are $450,000.

Ex. 277

On March 1, A1 Health Services Company borrows $80,000 from Jackson County Bank by signing a 6-month, 6%, interest-bearing note.

Instructions

Prepare the necessary entries below associated with the note payable on the books of A1.

(a) Prepare the entry on March 1 when the note was issued.

(b) Prepare any adjusting entries necessary on June 30 in order to prepare the semiannual financial statements. Assume no other interest accrual entries have been made.

(c) Prepare the entry to record payment of the note at maturity.

Ex. 278

On June 1, Ace Company borrows $50,000 from the bank by signing a 60-day, 6%, interest-bearing note.

Instructions

Prepare the necessary entries below associated with the note payable on the books of Ace.

(a) Prepare the entry on June 1 when the note was issued.

(b) Prepare any adjusting entries necessary on June 30 in order to prepare the monthly financial statements. Assume no other interest accrual entries have been made.

1. Prepare the entry to record payment of the note at maturity.

Ex. 279

On May 15, A1 Company borrowed money on a 4-month note to provide cash during the slow season of the year. The interest rate on the note was 8%. At the time the note was due, the amount of interest owed was $1,200.

Instructions

(a) Determine the amount borrowed by A1 (round to the nearest thousand).

(b) Assume the amount borrowed was $54,000. What was the interest rate if the amount of interest owed was $900?

(c) Prepare the entry for the initial borrowing and the repayment for the facts in part (a) Assume that interest has not been accrued.

Ex. 280

In providing accounting services to small business, you encounter the following situations pertaining to cash sales:

(1) Company A rings up sales and sales taxes separately on its cash register. On April 10 the register totals are sales $40,000 and sales taxes $2,800.

(2) Company B does not segregate sales and sales taxes. Its register total for April 15 is $22,260, which includes a 6% sales tax.

Instructions

Prepare the entries to record the sales transactions and related taxes for (a) Company A and (b) Company B.

Ex. 281

During the month of March, Ace Company's employees earned wages of $90,000. Withholdings related to these wages were $6,885 for Social Security (FICA), $14,200 for federal income tax, $6,200 for state income tax, and $600 for union dues. The company incurred no cost related to these earnings for federal unemployment tax, but incurred $1,300 for state unemployment tax.

Instructions

(a) Prepare the necessary March 31 journal entry to record wages expense and wages payable. Assume that wages earned during March will be paid during April.

(b) Prepare the entry to record the company's payroll tax expense.

Ex. 282

Presented below are two independent situations:

(a) Company A redeemed $480,000 of its bonds on June 30, 2025, at 102 and immediately retired them. The carrying value of the bonds on the retirement date was $431,100. The bonds pay annual interest and the interest payment due on June 30, 2025 has been made and recorded.

(b) Company B redeemed $330,000 of its bonds at 96 on June 30, 2025, and immediately retired them. The carrying value of the bonds on the retirement date was $321,000. The bonds pay annual interest and the interest payment due on June 30, 2025 has been made and recorded.

Instructions

For each of the independent situations, prepare the journal entry to record the retirement or conversion of the bonds.

Ex. 283

The adjusted trial balance for A1 Service Corporation at the end of 2025 contained the following accounts:

Bonds payable, 10% $500,000

Interest payable 20,000

Discount on bonds payable 30,000

Notes payable, 9%, due 2027 70,000

Accounts payable 120,000

Instructions

(a) Prepare the long-term liabilities section of the balance sheet.

(b) Indicate the proper balance sheet classification for the accounts listed above that do not belong in the long-term liabilities section.

Ex. 284

Ace Industries, Inc. reports the following liabilities (in thousands) on its January 31, 2025 balance sheet and notes to the financial statements.

Accounts payable $3,463.9

Accrued pension liability-long-term 1,215.2

Property taxes payable 1,158.1

Bonds payable 1,961.2

Current portion of long-term debt 1,992.2

Income taxes payable 235.2

Notes payable—long-term 9,246.7

Mortgage payable 435.6

Federal income taxes payable 558.1

Salaries and wages payable 2,563.6

Unused operating line of credit 3,337.6

Warranty liability— current 1,617.3

Instructions

Prepare the liabilities section of Ace's balance sheet at January 31, 2025.

Ex. 285

McDonald's financial statements contained the following selected data (in millions).

Current assets $ 3,881.9

Total assets 29,391.7

Current liabilities 4,498.5

Total liabilities 13,611.9

Interest expense $ 410.1

Income taxe expense 1,237.1

Net income 2,395.1

Instructions

Compute the following values and provide a brief interpretation of each.

(a) Current Ratio

(b) Debt to assets ratio.

(c) Times interest earned.

*Ex. 286

Ace Pet Supply Company issued $300,000 of 8%, 10-year bonds at 102. Interest is paid annually, and the straight-line method is used for amortization. Assume that the market rate for similar investments is 7%. The bonds are issued on the date of the bonds.

1. What amount was received for the bonds?
2. How much interest is paid each interest period?
3. What is the premium amortization for the first interest period?
4. How much interest expense is recorded on the first interest date?
5. What is the carrying value of the bonds after the first interest date?

*Ex. 287

On January 1, 2025, Acme Corporation issued $600,000, 5%, 5-year bonds dated January 1, 2025 at 95. The bonds pay annual interest on January 1. The company uses the straight-line method of amortization and has a calendar year-end.

Instructions

Prepare all the journal entries that Acme Corporation would make related to this bond issue through January 1, 2026. Be sure to indicate the date on which the entries would be made.

*Ex. 288

A1 Company issued $800,000, 10%, 20-year bonds on January 1, 2025 at 104. Interest is payable annually on January 1. A1 uses the straight-line method of amortization and has a calendar year-end.

Instructions

Prepare all journal entries made in 2025 related to the bond issue.

*Ex. 289

Suppose that Walmart issued $2,000,000, 7%, 20-year bonds on January 1, 2025 at 105. Interest is payable annually on January 1. Walmart uses straight-line amortization for bond premium or discount.

Instructions

Prepare the journal entries to record the following events.

(a) The issuance of the bonds.

(b) The accrual of interest and the premium amortization on December 31, 2025.

(c) The payment of interest on January 1, 2024.

(d) The redemption of the bonds at maturity, assuming interest for the last interest period has been paid and recorded.

*Ex. 290

Suppose that Patagonia issued $1,000,000, 8%, 10-year bonds on December 31, 2024 for $960,000. Interest is payable annually on December 31. Patagonia uses the straight-line method to amortize bond premium or discount.

Instructions

Prepare the journal entries to record the following events.

(a) The issuance of the bonds.

(b) The payment of interest and the discount amortization on December 31, 2025.

(c) The redemption of the bonds at maturity, assuming interest for the last interest period, has been paid and recorded.

*Ex. 291

Ace Restaurant Supply Company issued $900,000 of 10%, 5-year bonds at 108. Interest is paid annually, and the effective interest method is used for amortization. Assume that the market rate for similar investments is 8%. The bonds are issued on the date of the bonds.

a. What amount was received for the bonds?

b. How much interest is paid each interest period?

c. What is the premium amortization for the first interest period?

d. How much interest expense is recorded on the first interest date?

e. What is the carrying value of the bonds after the first interest date?

*Ex. 292

A1 Outfitters issued $500,000, 10%, 5-year bonds on January 1, 2025, at 106. Interest is payable annually on January 1. A1 uses the effective-interest method of amortization and has a calendar year-end and the bonds were issued for an effective interest rate of 8%.

Instructions

Prepare all journal entries made in 2025 related to the bond issue.

*Ex. 293

Suppose that adidas receives $2,200,000 when it issues a $2,200,000, 8%, mortgage note payable to finance the construction of a building at December 31, 2025. The terms provide for annual installment payments of $257,000 on December 31.

Instructions

Prepare the journal entries to record the mortgage loan and the first two installment payments.