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Exam 7: Accounting for Liabilities

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Question 51

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In December Year 1, Lucas Corporation sold merchandise for $10,000 cash. Lucas estimated that $700 of warranty claims might be filed in regard to these sales. On February 12, Year 2, warranty work amounting to $550 was performed for one of the customers ($430 labor paid in cash and $120 from the materials inventory) . Which of the following answers indicates the effect of the February 12, Year 2 transaction on the financial statements of Lucas Corporation?

A) Choice A
B) Choice B
C) Choice C
D) Choice D

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

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Question 52

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Indicate whether each of the following statements about lines of credit is true or false. _____ a) Line-of-credit agreements generally involve a fluctuating rate of interest. _____ b) A line-of-credit agreement allows a company to borrow on an as-needed basis. _____ c) Interest rates on line-of-credit agreements are often pegged to the consumer price index. _____ d) The signing of a line-of-credit agreement is an asset source transaction. _____ e) The expense recognition for the payment of monthly interest is an asset exchange transaction.

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a) This is true. Interest rates fluctuat...

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Question 53

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The Gordon Corporation issued $70,000 of 6%, 5-year bonds on January 1, Year 1 at 98. The interest payments are due on December 31 each year. Gordon uses the straight-line method of amortization. Which of the following answers shows the effect of the bond issuance on the financial statements?

On January 1, Year 1, the Mahoney Company borrowed $324,000 cash from Sun Bank by issuing a five-year 8% term note. The principal and interest are repaid by making annual payments beginning on December 31, Year 1. The annual payment on the loan based on the present value of annuity factor would be $81,150. The amount of principal repayment included in the December 31, Year 1 payment is:

Wayne Company issued bonds with a face value of $600,000, a 6% stated rate of interest, and a 10-year term. The bonds were issued on January 1, Year 1, and Wayne uses the straight-line method of amortization. Interest is paid annually on December 31. Assuming Wayne issued the bonds for 102½, the carrying value of the bonds on the December 31, Year 1 balance sheet would be:

How does the amortization of the principal balance on an installment note payable affect the amount of interest expense recorded each succeeding year?

On a classified balance sheet, the financial statement user will be able to distinguish between:

If bonds with a face value of $200,000 are issued at 98, the amount of cash received from issuing the bonds is $204,082.

Which of the following reflects the effect of the year-end estimation of warranty expense?

Interest charges on notes payable may be based on a(n) :

At the end of Year 1, Durango Company recognized its obligation under product warranties. During Year 2, it replaced products to its customers under the terms of the warranties. The Year 2 warranty settlements should be recorded as asset use transactions.

The Gordon Corporation issued $70,000 of 6%, 5-year bonds on January 1, Year 1 at 98. The interest payments are due on December 31 each year. Gordon uses the straight-line method of amortization. On December 31, Year 5, Gordon Corporation records interest and amortization. Immediately after that, Gordon pays off the bonds as scheduled. Which of the following answers shows the effect of the bond payoff on the financial statements?

Sales tax is reported as revenue when it is collected, and reported as an expense when it is paid.

A line of credit is an agreement that allows a company to borrow a set amount of money for a period of one year or more.

Currie Company borrowed $20,000 from the Sierra Bank by issuing a 10% three-year note. Currie agreed to repay the principal and interest by making annual payments in the amount of $8,042. Based on this information, the amount of the interest expense associated with the second payment would be: (Round your answer to the nearest dollar.)

Which of the following items is not classified as a current asset?

North Woods Company has a line of credit with the Olympia State Bank. North Woods agreed to pay interest at an annual rate equal to 2% above the bank's prime rate. Funds are borrowed or repaid on the first day of each month and interest is paid in cash on the last day of each month. Borrowing is shown as a positive amount, and repayments are shown as negative amounts indicated by parentheses. Activity to date is given as follows: The amount of interest paid at the end of March would be:

Recognizing the obligation for product warranties is a claims exchange transaction.

Indicate whether each of the following statements is true or false. _____ a) Interest expense on long-term installment notes increases each year. _____ b) Cash for machinery or buildings is often obtained by issuing long-term debt. _____ c) Short-term notes payable normally mature within a year. _____ d) Long-term installment notes are repaid all at once two to five years after the issue date. _____ e) Most long-term loans are obtained from the corporation's stockholders.

King Company experienced an accounting event that affected its financial statements as indicated below: Which of the following accounting events could have caused these effects on King's statements?