Test Bank Docx Ch.15 Capital Resource Process Finance Deines

Chapter 15

Recording and Evaluating Capital Resource Process Activities: Financing

MATCHING

1. Match the following terms with the descriptions and definitions below.

A) Discount on Notes Payable

B) Paid-in Capital from Treasury Stock Transactions

C) Paid-in Capital in Excess of Par

D) Premium on Bonds Payable

E) Stock Dividend Distributable

_____ 1. Account used to record the difference between the face value and proceeds

when the market rate of interest is less than the face rate of interest.

_____ 2. Account used to record the excess of the reissue price of treasury stock over

the initial cost of the treasury stock.

_____ 3. Account used to record the declaration of a stock dividend.

_____ 4. Account used to record the difference between the face value and proceeds

when the market rate of interest is greater than the face rate of interest.

_____ 5. The account used to record the difference between the issue price of stock and

its legal minimum price.

Answers: 1. D; 2. B; 3. E; 4. A; 5. C

2. Match the following account titles below with their normal account balance D for Debit and C for Credit.

_____ 1) Discount on Notes Payable

_____ 2) Paid-in Capital from Treasury Stock Transactions

_____ 3) Paid-in Capital in Excess of Par

_____ 4) Premium on Bonds Payable

_____ 5) Stock Dividend Distributable

_____ 6) Treasury Stock

Answers: 1. D; 2. C; 3. C; 4. C; 5. C; 6. D

1. Match the classifications below with accounts below.

DL—Debit balance in liability classification

CL—Credit balance in a liability classification

DOE—Debit balance in an owners’ equity classification

COE—Credit balance in an owners’ equity classification

_____ 1. Notes Payable

_____ 2. Premium on Notes Payable

_____ 3. Treasury Stock

_____ 4. Dividend Payable

_____ 5. Common Stock

_____ 6. Paid-in-Capital in Excess of Par

_____ 7. Paid-in-Capital from Treasury Stock

_____ 8. Discount on Notes Payable

_____ 9. Stock Dividend Distributable

_____10. Preferred Stock

Answers: 1. CL; 2. CL; 3. DOE; 4. CL; 5. COE; 6. COE; 7.COE; 8. DL; 9. COE; 10. COE

4. Match the following classifications on the financial statements with the accounts below.

A. Income Statement

B. Reduction of liability

C. Addition to liability

D. Liability

E. Owners’ Equity

F. Reduction in Owners’ Equity

_____ 1. Notes Payable

_____ 2. Premium on Notes Payable

_____ 3. Treasury Stock

_____ 4. Dividend Payable

_____ 5. Common Stock

_____ 6. Paid-in-Capital in Excess of Par

_____ 7. Paid-in-Capital from Treasury Stock

_____ 8. Discount on Notes Payable

_____ 9. Interest Expense

_____10. Preferred Stock

Answers: 1. D; 2. C; 3. F; 4. D; 5. E; 6. E ; 7. E; 8. B; 9. A; 10. E

MULTIPLE CHOICE

5. Hunter Corporation beginning of year retained earnings balance was $28,300. The corporation declared and paid dividends of $19,400 during the year and ended the year with a $36,500 balance. The net income or loss for the year was:

A) $(11,200).

B) $ 8,200.

C) $ 17,100.

D) $ 27,600.

6. Noncash assets given to a corporation in exchange for stock would be recorded at:

A) their book value when owned directly by the stockholder.

B) cost less accumulated depreciation.

C) fair market value.

D) depreciable cost.

7. Carolina Corporation just issued 10,000 shares of $2 par value common stock for $7.50 per share. The journal entry to record this transaction will include a:

A) debit to Donated Capital for $75,000.

B) credit to Common Stock for $75,000.

C) debit to Retained Earnings for $20,000.

D) credit to Paid-in Capital in Excess of Par-Common Stock for $55,000.

8. Carolina Corporation just issued 10,000 shares of $2 par value common stock for $7.50 per share. The journal entry to record this transaction will include all the following except:

A) debit to cash for $75,000.

B) credit to Common Stock for $20,000.

C) credit to Retained Earnings for $75,000.

D) credit to Paid-in Capital in Excess of Par-Common Stock for $55,000 .

9. The journal entry to record the issuance of no par common stock could include all of the following except a:

A) debit to Cash.

B) debit to Equipment.

C) credit to Common Stock.

D) credit to Paid-in-Capital in Excess of Par-Common Stock

10. E&F Corporation issued 3,000 shares of $10 par value common stock in exchange for a tract of land valued at $135,000. Since all company stock is privately held, there is no market value for the stock. The journal entry to record this exchange includes a:

A) credit to Paid-in Capital in Excess of Par–Common Stock for $105,000.

B) credit to Common Stock for $135,000.

C) debit to Donated Capital for $105,000.

D) debit to Land for $30,000.

11. Mustang Corporation issued 5,000 shares of $1 par value common stock in exchange for some equipment with an asking price of $75,000. The stock was sold the day before at a price of $13 per share. The journal entry to record this exchange includes a:

A) credit to Paid-in Capital in Excess of Par–Common Stock for $60,000.

B) credit to Common Stock for $60,000.

C) debit to equipment for $5,000.

D) debit to equipment for $75,000.

12. Quality Corporation has 500,000 shares of $1 par value common stock authorized and 200,000 shares issued and outstanding. Land worth $100,000 received in exchange for 10,000 shares of common stock of the corporation would do all the following except:

A) increase the number of shares of common stock issued and outstanding to 210,000 shares.

B) increase the total in the common stock account by $10,000.

C) increase paid in capital in excess of par by $90,000.

D) increase Retained Earnings by $100,000.

13. All of the following would reduce the balance in Retained Earnings except:

A) cash dividends.

B) large stock dividends.

C) small stock dividends.

D) the acquisition of treasury stock.

14. When the Retained Earnings account has a debit balance, it is referred to as a:

A) loss.

B) deficit.

C) cumulative loss.

D) donation of capital.

15. The journal entry to record the declaration of a cash dividend would include a:

A) credit to Cash.

B) debit to Dividend Expense.

C) debit to Retained Earnings.

D) debit to Dividends Payable.

16. A Deficit in Retained Earnings can be created by all the following except:

A) Net losses exceeding net income.

B) Paying more in dividends than earnings generated.

C) Receiving less than the par value when stock is issued.

D) All the above can create a deficit.

17. The entry to record the declaration and the entry to record the payment of a cash dividend would include all the following except:

A) credit to dividend payable.

B) debit to Retained Earnings.

C) debit to dividend payable.

D) debit to dividend expense.

18. The account “Stock Dividends Distributable” would be shown on a company’s financial statements as:

A) contributed capital.

B) an expense.

C) a liability.

D) revenue.

19. A common stock dividend results in a decrease in:

A) assets.

B) common stock.

C) retained earnings.

D) both assets and retained earnings.

20. Which of the following is true about a stock dividend?

A) Assets decrease and owners’ equity decreases.

B) Assets increase and Liabilities increase.

C) Contributed Capital increases and Retained earnings decreases.

D) Liabilities decrease and Contributed Capital Increases.

21. PAC Corporation has 500,000 shares of $5 par value common stock authorized, and 300,000 shares issued and outstanding. The market value of the stock is $14 per share. The journal entry to record the declaration of a 15 percent stock dividend would include a:

A) credit to dividend payable for $1,050,000.

B) credit to Common Stock for $375,000.

C) debit to Retained Earnings for $630,000.

D) credit to Stock Dividends Distributable for $375,000.

22. Foster Corporation has 800,000 shares of $3 par value common stock authorized, and 350,000 shares issued and outstanding. The market value of the stock is $22 per share. The journal entry to record the declaration of a 75 percent stock dividend would include a:

A) credit to dividend payable for $1,800,000.

B) credit to Common Stock Dividends Distributable for $787,500.

C) debit to Retained Earnings for $5,775,000.

D) credit to Common Stock Dividends Distributable for $4,987,500.

23. Olio Corporation has 900,000 shares of $1 par value common stock authorized, and 550,000 shares issued and outstanding. The market value of the stock is $18 per share. The journal entry to record the declaration of a 10 percent stock dividend would include a:

A) credit to dividend payable for $90,000.

B) credit to Common Stock Dividends Distributable for $90,000.

C) debit to Retained Earnings for $990,000.

D) credit to Paid-in-Capital in Excess of Par for $55,000.

24. The journal entry to record the distribution of a small common stock dividend would include a:

A) credit to Paid-in-Capital in Excess of Par--Common Stock.

B) debit to Stock Dividends Distributable.

C) credit to Retained Earnings.

D) debit to Common Stock.

25. All the following are true statements about the declaration and distribution of stock dividends except which one?

A) Stock dividends reduce the assets of the firm.

B) Stock dividends do not increase or decrease liabilities.

C) Stock dividends increase contributed capital.

D) Stock dividends decrease retained earnings.

26. A stockholder who received a 10 percent common stock dividend would have an increase in her/his ownership percentage equal to:

A) 10 percent.

B) 20 percent.

C) cannot be determined from the information given.

D) there would be no change in the ownership percentage.

27. Treasury stock is shown in a company’s financial statements as a(n):

A) intangible asset.

B) contra equity.

C) current asset.

D) contra asset.

28. Reissuing treasury stock at a price higher than the price paid to acquire the stock results in a(n):

A) increase in contributed capital.

B) decrease in contributed capital.

C) loss reported on the income statement.

D) gain reported on the income statement.

29. J&C Corporation purchased for the treasury 1,000 shares of its own $1 par value common stock at $20 per share. This was the first time the company had ever purchased treasury stock. Shortly thereafter, J&C sold 400 shares of this treasury stock at $17 per share. The journal entry to record the sale of the treasury stock would include a:

A) credit to Cash for $8,000.

B) debit to Treasury Stock for $6,800.

C) debit to Retained Earnings for $1,200.

D) debit to Loss from Treasury Stock Transactions for $1,200.

30. Bobber Corporation purchased 1,000 shares of its own $1 par value common stock at $10 per share. This was the first time the company had ever purchased treasury stock. Shortly thereafter, Bobber sold 100 shares of this treasury stock at $13 per share. The journal entry to record the sale of the treasury stock would include a:

A) credit to Gain on Sale of Treasury Stock $300.

B) debit to Treasury Stock for $100.

C) debit to Retained Earnings for $1,300.

D) credit to Paid-in Capital from Treasury Stock Transactions for $300.

31. A 100 percent stock dividend and a 2-for-1 stock split are similar in that:

A) the par value of the company’s stock will be cut in half.

B) the number of shares of stock outstanding will double.

C) total stockholders’ equity will remain unchanged.

D) both b and c are correct

32. Callisto began 2008 with 100,000 shares of $3 par common stock. The firm declared a 3-for-1 stock split on March 1, 2008. How will the stock split affect Callisto’s stockholders’ equity?

A) $300,000 will be transferred from paid-in capital to retained earnings.

B) $300,000 will be transferred from retained earnings to paid-in capital.

C) Neither total paid-in capital nor retained earnings will change.

D) Stockholders’ equity will be decreased by $300,000.

33. Where in the balance sheet is preferred stock usually reported?

A) Long-term liabilities

B) Stockholders’ equity

C) Contra stockholders’ equity

D) After long-term liabilities but before stockholders’ equity

34. Which of the following would not appear in the stockholders’ equity section of the balance sheet?

A) Gain on sale of treasury stock

B) Additional paid-in capital

C) Retained earnings

D) Treasury stock

35. If stock with a $2 par value was issued for $12 per share,

A) common stock would be credited for $12 per share.

B) common stock cannot be issued for more than par value.

C) paid-in capital in excess of par should be credited for $10 per share.

D) gain on sale of common stock should be credited for $10 per share.

36. Retained earnings represent

A) total cash accumulated by a firm over its existence.

B) earnings not available for payment of dividends.

C) earnings to date less dividends paid to date.

D) cash restricted for payment of dividends.

37. What type of account is Stock Dividend Distributable?

A) Contra contributed capital

B) Contributed capital

C) Contra asset

D) Liability

38. How does the declaration and payment of a cash dividend affect a firm?

A) Decreases stockholders’ equity

B) Increases stockholders’ equity

C) No effect on stockholders’ equity or assets

D) Decreases stockholders’ equity and total assets

39. How does the declaration and distribution of a stock dividend affect a firm?

A) Decreases stockholders’ equity

B) Increases stockholders’ equity

C) No change in total stockholders’ equity or assets

D) Decreases total stockholders’ equity and total assets

40. How would the purchase of treasury stock affect the market price of a firm’s common stock?

A) Increases it

B) Decreases it

C) No effect

D) Increase or decrease depending on the number of shares purchased

41. Which of the following would tend to cause the market price of common stock to decrease?

A) Declaration of reverse stock split

B) Declaration of stock dividend

C) Issuance of additional shares

D) Purchase of treasury stock

42. The two major elements of stockholders’ equity are:

A) retained earnings and distributable earnings.

B) contributed capital and donated capital.

C) paid-in capital and contributed capital.

D) paid-in capital and retained earnings.

43. When a corporation issues its own stock in payment for goods or services, the least appropriate value to use in recording the transaction is:

A) appraised value of the goods or services.

B) market value of the goods or services.

C) market value of the stock.

D) par value of the stock.

44. The issuance of common stock for cash would appear on the:

A) income statement and statement of cash flows.

B) statement of cash flows and statement of stockholders’ equity.

C) income statement, balance sheet, and statement of stockholders’ equity.

D) income statement, statement of cash flows, and statement of stockholders’ equity.

45. During 2010, Delenn Company issued common stock for cash. Which part of the statement of cash flows would be affected by the sale of the common stock?

A) Operating activities

B) Financing activities

C) Operating and financing activities

D) Investing activities

46. The premium on Notes Payable account is a(n):

A) adjunct liability account.

B) contra liability account.

C) contributed liability account.

D) equity account.

47. As the Discount on Notes Payable account is reduced,

A) a credit is made to the Interest Expense account.

B) the market value of the note is also reduced.

C) the carrying value of the note is increased.

D) the face rate of interest is increased.

48. As the Premium on Notes Payable account is reduced,

A) Interest Expense is increased.

B) the market value of the note is also reduced.

C) the carrying value of the note is decreased.

D) the face rate of interest is increased.

49. The Discount on Notes Payable account is always used when accounting for a(n):

A) noninterest-bearing note.

B) interest-bearing note.

C) contra payment note.

D) installment note.

50. The interest expense recognized on a noninterest-bearing note is calculated using:

A) the face rate of interest.

B) the market rate of interest.

C) both (b) and (d).

D) the prime rate of interest.

51. As a discount on notes payable is amortized,

A) the carrying value of the note and interest expense are increased.

B) both the carrying value of the note is and interest expense are unchanged.

C) the carrying value of the note decreases and interest expense increases.

D) the carrying value of the note increases and the interest expense decreases.

52. As a premium on notes payable is amortized,

A) the carrying value of the note and interest expense are increased.

B) both the carrying value of the note is unchanged and interest expenses are unchanged.

C) the carrying value of the note decreases and interest expense decreases.

D) the carrying value of the note increases and the interest expense decreases.

53. Each payment on a periodic payment note payable includes:

A) interest only.

B) principal only.

C) interest and discount.

D) interest and principal.

54. In a periodic payment note, the amount borrowed is equal to the:

A) face value of the note plus interest expense calculated at market rate.

B) face value of the note less interest expense calculated at market rate.

C) face value of the note less the discount on note payable.

D) face value of the note.

55. The journal entry to record a payment on an installment note would include all of the following except:

A) credit to Cash.

B) debit to Interest Expense.

C) debit to Notes Payable.

D) credit to Discount on Notes Payable.

56. The journal entry to record the purchase of equipment by making a down payment and signing an installment note for the balance would include a:

A) credit to Installment Notes Payable.

B) debit to Interest Expense.

C) credit to Equipment.

D) debit to Cash.

57. The cash payment on an installment note would appear on the statement of cash flows in the:

A) operating activities section.

B) investing activities section.

C) financing activities section.

D) operating and financing activities sections.

58. The balance due on a 5-year installment note due in 3 years would appear on the balance sheet in the:

A) other liabilities section.

B) current liabilities section.

C) long-term liabilities section.

D) current and long-term liabilities sections.

59. In a noninterest-bearing note, the amount borrowed is which of the following?

A) Face value of the note

B) Face value of the note less the discount on note payable

C) Face value of the note plus a premium on the note payable

D) Face value of the note less interest expense calculated at the face rate of interest

60. The face value of a noninterest-bearing note less the discount on notes payable is called the ________ of the note.

A) contra value

B) market value

C) interest value

D) carrying value

61. The journal entry recorded by a company when it signs a noninterest-bearing note in exchange for a tract of land would include a:

A) debit to Discount on Notes Payable

B) credit to Interest Payable

C) debit to Notes Payable

D) credit to Land

62. The journal entry to record the year-end accrual of interest expense on a noninterest-bearing note could include all the following except:

A) credit to Cash.

B) debit to Interest Expense.

C) credit to Interest Payable.

D) credit to Discount on Notes Payable.

63. The final cash payment of the face value of a noninterest-bearing note would appear on the statement of cash flows in the:

A) operating activities section.

B) investing activities section.

C) financing activities section.

D) operating and financing activities sections.

64. The journal entry to record the issuance of bonds when the market rate of interest is equal to the face rate of interest would include a:

A) both b and d are correct.

B) credit to Bonds Payable.

C) debit to Discount on Bonds Payable.

D) credit to Premium on Bonds Payable.

65. The cash payments made during the fifth year of a 10-year interest-bearing note would be reported on the statement of cash flows in:

A) both (b) and (c).

B) the operating activities section.

C) the investing activities section.

D) the financing activities section.

66. The total cash payments made in the year of maturity relative to an interest-bearing note would be reported on the statement of cash flows in the:

A) operating activities section.

B) investing activities section.

C) financing activities section.

D) both a and c are correct.

67. When the market rate of interest on the date bonds are issued is higher than the face rate of interest on the bonds:

A) the proceeds from the issuance of the bonds will be greater than the face value of the bonds.

B) the bonds are issued at a premium.

C) the bonds are issued at a discount.

D) both a and c are correct.

68. When the market rate of interest on the date bonds are issued is lower than the face rate of interest on the bonds:

A) the proceeds from the issuance of the bonds will be less than the face value of the bonds.

B) the bonds are issued at a premium.

C) the bonds are issued at a discount.

D) both a and c are correct.

69. The journal entry to record the interest payment of a bond payable issued at a discount would include a:

A) debit to Discount on Bonds Payable.

B) debit to Interest Expense.

C) credit to Bonds Payable.

D) debit to Cash.

70. Bonds are issued at a discount when the:

A) proceeds from the issuance of the bonds are smaller than the face value of the bonds.

B) market rate of interest is higher than the face rate of interest on the bonds.

C) face rate of interest on the bonds is equal to the market rate of interest.

D) both a and b are correct.

71. The amortization of a discount on bonds payable:

A) decreases the carrying value of the bonds.

B) increases the amount of interest expense recorded for the bonds.

C) decreases the amount of interest expense recorded for the bonds.

D) has no effect on the amount of interest expense recorded for the bonds.

72. On the maturity date of bonds issued at a discount:

A) the Discount on Bonds Payable account has been fully amortized.

B) the amount of the liability is equal to the face value of the bonds.

C) the carrying value of the bonds is less than face value.

D) both a and b are correct.

73. The amortization of a discount on bonds payable:

A) has no effect on the cash payments for interest reported in the operating activities section of the statement of cash flows.

B) decreases the cash payments for interest reported in the operating activities section of the statement of cash flows.

C) increases the cash payments for interest reported in the operating activities section of the statement of cash flows.

D) is reported in the financing activities section of the statement of cash flows.

74. When the face rate of interest is higher than the market rate of interest on the date bonds are issued,

A) the proceeds from the issuance of the bonds are less than the face value of the bonds.

B) the bonds are issued at a premium.

C) the bonds are issued at a discount.

D) both a and c are correct.

75. When the face rate of interest is lower than the market rate of interest on the date bonds are issued,

A) the proceeds from the issuance of the bonds are greater than the face value of the bonds.

B) the bonds are issued at a premium.

C) the bonds are issued at a discount.

D) both a and b are correct.

76. The journal entry to record the interest expense of a bond payable issued at a premium would include a:

A) debit to Cash.

B) credit to Bonds Payable.

C) credit to Interest Expense.

D) debit to Premium on Bonds Payable.

77. Bonds are issued at a premium when the:

A) proceeds from the issuance of the bonds are greater than the face value of the bonds.

B) market rate of interest is lower than the face rate of interest on the bonds.

C) face rate of interest on the bonds is equal to the market rate of interest.

D) both a and b are correct.

78. The amortization of a premium on bonds payable:

A) increases the carrying value of the bonds.

B) increases the amount of interest expense recorded for the bonds.

C) decreases the amount of interest expense recorded for the bonds.

D) has no effect on the amount of interest expense recorded for the bonds.

79. The amortization of a premium on bonds payable:

A) decreases the carrying value of the bonds.

B) increases the amount of interest expense recorded for the bonds.

C) decreases the amount of cash paid at the interest date.

D) has no effect on the amount of interest expense recorded for the bonds.

80. On the maturity date of bonds issued at a premium,

A) the Premium on Bonds Payable account is zero.

B) the carrying value of the bonds is greater than face value.

C) the carrying value of the bonds is less than face value.

D) both a and b are correct.

81. The amortization of a premium on bonds payable:

A) has no effect on the cash payments for interest reported in the operating activities section of the statement of cash flows.

B) increases the cash payments for interest reported in the operating activities section of the statement of cash flows.

C) decreases the cash payments for interest reported in the operating activities section of the statement of cash flows.

D) is reported in the financing activities section of the statement of cash flows.

82. How does the amortization of discounts and premiums affect the carrying value of bonds?

Discount Premium

A) Increase Increase

B) Decrease Increase

C) Increase Decrease

D) Decrease Decrease

83. How does the amount of premium and discount amortized in each period change over the term of bonds?

Discount Premium

A) Increase Increase

B) Decrease Increase

C) Increase Decrease

D) Decrease Decrease

84. Bonds payable have a face amount of $1,000,000 and a discount of $10,000. The face interest rate is 9 percent and the effective interest rate is 10 percent. If the annual interest payment is due today, what amount of interest expense should be recorded?

A) $100,000

B) $ 99,000

C) $ 90,000

D) $ 89,100

85. When a bond premium is being amortized, at maturity,

A) the premium will be equal to the face value of the bonds.

B) the premium is written off and a gain or loss is recorded.

C) the carrying value of the bond is equal to the face value of the bonds.

D) the carrying value of the bond will be greater than original issue price.

86. What would happen if a firm fails to record the amortization of premium on bonds payable?

A) Interest payments would be understated.

B) Interest payments would be overstated.

C) Interest expense would be understated.

D) Interest expense would be overstated.

87. If bonds are issued at a discount at the beginning of the year, how will information related to the bonds be reported on the statement of cash flows in the year of issuance?

A) The bond proceeds will increase and the interest paid will decrease cash from financing activities.

B) The bond proceeds will increase cash from financing activities and the interest paid will decrease cash from operating activities.

C) The bond proceeds will increase cash from financing activities and the interest expense will decrease cash from operating activities.

D) The bond proceeds will increase cash from financing activities, the interest paid will decrease cash from operating activities, and discount amortization will decrease cash from investing activities.

88. Darvin Company purchased equipment with a fair value of $100,000 on a 6 percent, 4-year installment note. What would be Darvin’s annual payment on the note, assuming that payments are made at year-end?

A) $25,000

B) $27,226

C) $28,859

D) Unable to determine from the information given

89. Lester Corporation purchased equipment with a fair value of $150,000 on a 6 percent note. The note requires four end-of-year payments of $43,290. What would be the carrying value of the note immediately after the first payment?

A) $106,710

B) $115,710

C) $141,000

D) Unable to determine from the information given

90. What constitutes the carrying value of a noninterest-bearing note?

A) The amount due at maturity

B) The present value of the amount due at maturity

C) The amount due at maturity less interest recognized to date

D) The present value of the amount due at maturity less interest recognized to date

91. Trego Corporation purchased equipment with a fair value of $150,000 on a 6 percent note. The note requires four end-of-year payments of $43,290. How much of the first payment would be principal?

A) $43,290

B) $ 43,290 / 4 = $10,822.50

C) $9,000

D) Unable to determine from the information given

92. Under which of the following situations would a firm repurchasing bonds in the secondary market report a loss?

A) The current market rate of interest is greater than the market rate when the bonds were issued.

B) The current market rate of interest is greater than the stated rate on the bonds.

C) The current market price of the bonds is greater than carrying value of the bonds.

D) The current market price of the bonds is greater than face value of the bonds.

93. Under which of the following conditions would a firm have a loss on repurchased debt?

A) Face value exceeds current market price of bonds.

B) Current market price exceeds face value of bonds.

C) Current market price exceeds carrying value of bonds.

D) Current market price exceeds original issue price of bonds.

94. When a company retires its outstanding bonds prior to their maturity by purchasing them in the secondary market,

A) a loss results when the purchase price is less than the carrying value of the bonds.

B) any unamortized discount or premium is immediately charged to interest expense.

C) the Bonds Payable account is debited for an amount equal to the maturity value of the bonds.

D) a gain results when the carrying value of the bonds is less than the purchase price

of the bonds.

95. In the secondary market, when the market rate of interest on bonds increases,

A) bond prices decline.

B) bond prices increase.

C) both b and d are correct.

D) the carrying value of the bonds increases.

96. When a company exercises a call feature and buys its outstanding bonds back prior to their maturity date,

A) the amount of cash paid depends on the market rate of interest at the time the bonds are called.

B) any related unamortized discount will be removed from the books.

C) the company will always pay less than face value for the bonds.

D) both a and b are correct.

97. Convertible bonds:

A) require the company to give the bondholders an amount equal to the market price of the bonds on a specific future date.

B) can be converted into stock at the bondholders’ option.

C) can result in an interequity transaction.

D) both b and c are correct.

98. The journal entry to record payments made on an operating lease would include a:

A) debit to Rent Expense.

B) credit to the asset leased.

C) debit to Interest Expense.

D) credit to Lease Payment Obligation.

99. The journal entry to record payments made on a capital lease would include a:

A) debit to Rent Expense.

B) credit to the asset leased.

C) debit to Interest Expense.

D) credit to Lease Payment Obligation.

100. A capital lease is a form of:

A) lump-sum note.

B) installment note.

C) none are correct.

D) periodic payment and lump sum note.

101. Which of the following is true about a capital lease?

A) It results in the recognition of depreciation expense on the leased asset.

B) It requires the recognition of a liability on the balance sheet.

C) It requires the reporting of periodic interest expense.

D) All the above are correct.

103. The journal entry to record payments made on a capital lease would include all the following except:

A) debit to Rent Expense.

B) credit to Cash.

C) debit to Interest Expense.

D) debit to Lease Payment Obligation.

104. Compare stock splits and stock dividends in terms of their effects on stockholders’ equity and market price.

105. If a firm has a normal balance in its retained earnings account, does that mean it has an equal amount of cash? Explain.

106. If a firm buys its own stock, how would the stock be reported on the balance sheet? Why is it reported that way?

107. “If a firm issues bonds at more than face value, the difference is a gain that should be recognized in the period of issuance.” Is this statement correct? Explain.

108. A corporation may “force” its convertible-bond holders to convert. How and why would it be able to do this?

109. Explain how a corporation’s income is taxed twice.

110. How does the effect on the balance sheet of retiring bonds early compare to the effect of having bonds converted?

111. Why are operating leases sometimes referred to as “off-the-balance-sheet financing”?

112. “Lessees prefer operating leases but lessors prefer capital leases.” Is this statement correct? Explain.

113. The charter of the BRHC Corporation authorizes the issuance of 3,000,000 shares of no par common stock and 1,000,000 shares of 10 percent, $100 par cumulative preferred stock. Events affecting the stockholders’ equity section during the first year of operations (2010) are listed below.

(1.) 300,000 shares of common stock were issued for $20 per share.

(2.) 25,000 shares of preferred stock were sold at $102 per share.

(3.) A building with a fair market value of $820,000 was acquired for a cash payment of $300,000 and 26,000 shares of common stock.

(4.) 30,000 shares of common stock were issued for $690,000 in cash.

(5.) Dividends for the preferred stock were declared and common stock dividend was declared for $1 per share.

Required:

(A.) Record the transaction described above.

(B.) Prepare the stockholders’ equity section of BRHC assuming that the corporation generated $1,200,000 of income in the first year.

114. Rollins Corporation has 1,000,000 shares of $4 par value common stock authorized, and 375,000 shares issued and outstanding. The stock had a market value of $22 per share when the board of directors declared a stock dividend. Prepare the journal entries to record the declaration and distribution of the stock dividend assuming (a) a 10 percent stock dividend was declared and (b) a 60 percent stock dividend was declared.

115. Harper Corporation entered into the following transactions:

July 1 Paid $15 per share to purchase 12,000 shares of its $1 par value common stock for

the treasury.

Oct. 5 Sold 4,000 shares of the treasury stock purchased on July 1, at a price of $18 per

share.

Nov. 8 Sold 5,000 shares of the treasury stock purchased on July 1, at a price of $13 per

share.

Dec. 9 Sold the remaining shares of treasury stock for $10 per share.

Prepare journal entries for the above transactions.

Answers:

*$12,000 – $10,000 = $2,000

$45,000 – $30,000 – $2,000 = $13,000

116. The Collyer Corporation authorizes the issuance of 5,000,000 shares of $1 par common stock and 1,000,000 shares of 10 percent, $50 par cumulative preferred stock. Events affecting the stockholders’ equity section during the first year of operations (2010) are listed below.

(1.) 500,000 shares of common stock were issued for $20 per share.

(2.) 25,000 shares of preferred stock were sold at $52 per share.

(3.) A building with a fair market value of $860,000 was acquired for a cash payment of

$200,000 and 30,000 shares of common stock.

(4.) 3,000 shares of common stock were repurchased for $15 per share.

(5.) Reissued 1,000 shares of the treasury stock for $20 per share.

(6.) Collyer generated $1,500,000 of income its first year and paid no dividends.

Required:

(A.) Record the transaction described above.

(B.) Prepare the stockholders’ equity section of Collyer Corporation.

Answers:

Cash 10,000,000

Common Stock 500,000

Paid-in-Capital in excess of par – CS 9,500,000

Cash 1,300,000

Preferred Stock 1,250,000

Paid-in-Capital in excess of par – PS 50,000

Building 860,000

Cash 200,000

Common Stock 30,000

Paid-in Capital in excess of par – CS 630,000

Treasury Stock 45,000

Cash 45,000

Cash 20,000

Treasury Stock 15,000

Paid-in Capital from Treasury Stock 5,000

(b.)

Less: Treasury Stock 30,000

Total Stockholders’ Equity $13,445,000

117. On January 2, 2010, Cardy Computers purchased machinery by paying $15,000 down and signing a 4-year, 10 percent installment note for the $60,000 balance. The loan agreement called for eight semi-annual payments beginning July 1, 2010. Determine the amount of each semi-annual payment (round to the nearest dollar) and prepare journal entries for the first two payments, including the accrual at year-end. Cardy has a December 31 year-end.

118. On September 1, 2010, Trego Contractors purchased machinery by paying $15,000 down and signing a 4-year, 10 percent installment note for the $60,000 balance. The loan agreement called for 8 semi-annual payments beginning March 1, 2011. Assume Trego has a 12/31 fiscal year end.

A. Determine the amount of each semi-annual payment (round to the nearest dollar).

B. Prepare journal entries for the first two payments, including the accrual at year-end.

C. Show how this note would impact the Trego’s income statement, balance sheet, and cash flow statements for the 12/31/10 fiscal year.

Answers:

PV = $60,000, n = 8, i = 10, c = 2. ANN = ? = $9,283.30

First payment:

$60,000 × 5% = $3,000 interest

$9,283 – $3,000 = $6,283 principal

Second payment:

($60,000 – $6,283) × 5% = $2,686 interest

$9,283 – $2,686 = $6,597 principal

12/31/10 Interest Expense ($3,000 × 4/6) 2,000

Interest Payable 2,000

3/1/11 Interest Expense ($3,000 × 2/6) 1,000

Installment Note Payable 6,283

Interest Payable 2,000

Cash 9,283

9/1/11 Interest Expense 2,686

Installment Notes Payable 6,597

Cash 9,283

Income Statement:

Interest Expense $2,000

Balance Sheet:

Current Liabilities

Interest Payable $ 2,000

Notes Payable 12,880

Long Term Liabilities:

Notes Payable $47,120

Cash Flow Statement:

Investing Activities

Cash Down Payment $15,000

119. Enco Dynamics purchased a tract of land from Spectrum Associates on July 1, 2010, by issuing a 5-year noninterest-bearing note with a face value of $150,000. Enco has a June 30 fiscal year end and normally pays a 12 percent rate of interest on similar notes payable balances. Prepare the journal entry to record the acquisition of the land and any other journal entries required relative to the note in the fiscal years ended June 30, 2011 and 2012. Show how the note would appear on Enco’s June 30, 2011 balance sheet.

Answers:

$150,000 x 0.5674 (PV of $1, n = 5, i = 12%) = $85,110 using Table

FV = $150,000, i = 12%, n = 5, c = 1, PV = ? = $85,114.03

7/1/10

Land

85,110

Discount on Notes Payable

64,890

Notes Payable

150,000

6/30/11

Interest Expense

10,213

Discount on Notes Payable

10,213

($85,110 × 12%)

6/30/12

Interest Expense

11,439

Discount on Notes Payable

11,439

($85,110 + $10,213) x 12%

Note Payable

$150,000

Less: Discount on Note Payable*

43,238

$106,762

*($64,890 - $10,213 - $11,439)

120. Magnum Industries issued $100,000 of bonds on October 1, 2010. Given the following partial bond amortization table for the bonds, prepare all necessary journal entries to record the issuance of the bond and the first year of the bond’s life assuming Magnum has a December 31 year-end. Show how the bonds would appear on Magnum’s 2010 income statement, balance sheet, and statement of cash flows for Magnum Industries.

121. Superscope Industries issued $100,000 of bonds on October 1, 2010. Given the following partial bond amortization table for the bonds, prepare all necessary journal entries to record the issuance of the bond and the first year of the bond’s life assuming Magnum has a December 31 year-end. Show how the bonds would appear on Superscope’s 2010 income statement, balance sheet and statement of cash flows for Superscope Industries.

3

10/1/10

Cash

94,490

Discount on Bonds Payable

5,509

Bonds Payable

100,000

12/31/10

Interest Expense

3,071

Discount on Bonds Payable

71

Interest Payable

3,000

4/1/11

Interest Expense

,3,071

Interest Payable

3,000

Discount Bonds Payable

71

Cash

6,000

10/1/11

Interest Expense

6,151

Discount on Bonds Payable

151

Cash

6,000

2010

Income Statement:

Interest Expense

$3,071

12/31/10

Balance Sheet:

Bonds Payable

$100,000

Less: Discount on Bonds Payable

5,439

$94,561

2010

Statement of Cash Flows:

Financing Activities

Cash received from issuance of bond

$94,490

122. Wagner Products, Inc. issued $100,000 of bonds on October 1, 2010. Given the following partial bond amortization table for these bonds, prepare the necessary journal entry to call in the entire bond issue on 4/1/13 at a call price of 109.

123. Stockton Enterprises signed a 4-year capital lease for a computer on June 30, 2010. The lease calls for $5,000 down, and four annual payments of $14,196 beginning on June 30, 2011. Stockton has a June 30 year-end and uses a 10 percent interest rate for all calculations relative to the lease. Prepare the necessary journal entries to record the signing of the lease on June 30, 2010 and the first lease payment on June 30, 2011. Show how the lease would appear on the June 30, 2011 balance sheet of Stockton Enterprises.