Accounting What The Numbers Mean 10th Edition Marshall Test Bank

Accounting What the Numbers Mean
10th Edition Marshall Test Bank

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mbers-mean-10th-edition-marshall-test-bank/
Chapter 07
Accounting for and Presentation of Liabilities
Multiple Choice Questions
1. A transaction that is likely to cause an increase in a current liability is:
A. payment of accrued wages.
B. accrual of interest expense.
C. depreciation of equipment.
D. accrual of bad debts expense.
2. The payment of a current liability will:
A. decrease net income.
B. decrease working capital.
C. increase working capital.
D. not affect working capital.
3. A working capital loan will generally:
A. not have an interest rate.
B. require that interest (if any) be paid monthly.
C. not affect working capital.
D. be classified as a noncurrent liability.
7-1
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4. Computing a borrower's effective interest rate is another application of which of the following
concepts?
A. Present value concept.
B. Current value concept.
C. Periodic interest concept.
D. None of these.
5. Which of the following is a true statement regarding interest calculation methods?
A. Interest is calculated on either a straight-basis or a delayed-basis.
B. Interest is calculated on either a straight-basis or an undiscounted-basis.
C. If a borrower receives a loan on a discount-basis, the APR will be less than the simple
interest.
D. If a borrower receives a loan on a discount-basis, the APR will be more than the simple
interest rate.
6. A loan discount is:
A. a loan used to purchase a bond at a discount.
B. a discount market interest rate on a loan.
C. the same as a bond discount.
D. None of these.
7-2
7. Cassady, Inc. borrowed $5,000 for 3 months at an APR of 10%. The amount of interest paid
on this loan was:
A. $240.
B. $120.
C. $125.
D. $500.
8. Bonner's, Inc. borrowed $12,000 for 4 months on a discount basis. The lender used an
interest rate of 8% to calculate the discount. The amount of cash Bonner's, Inc. actually had
available to use from this loan was:
A. $11,040.
B. $11,680.
C. $12,000.
D. $12,320.
9. When borrowing money, the most important objective of the borrower should be to:
A. minimize monthly payments.
B. minimize the APR.
C. avoid borrowing on a discount basis.
D. make the maturity date as far in the future as possible.
7-3
10. Interest on a Note Payable is most appropriately accrued:
A. when the note is signed.
B. as of the end of each accounting period during which the note is a liability.
C. when principal payments on the note are made.
D. when the interest is paid.
11. Current maturities of long-term debt:
A. reflect overdue installments of bonds payable.
B. are classified with long-term debt.
C. represent cash that has been set aside for debt payments due within a year.
D. permit a more accurate determination of working capital.
12. The purpose of reporting Current Maturities of Long-Term debt is to:
A. report any portion of a long-term borrowing that is to be paid in the upcoming accounting
period as a current liability.
B. reclassify a portion of debt from the noncurrent section of the balance sheet to the current
section of the balance sheet.
C. properly classify liabilities.
D. all of these.
7-4
13. When a supplier makes a downward adjustment in the amount owed by a creditor, the
creditor will:
A. reduce the amount of the account payable to the supplier, and decrease an asset such as
inventory.
B. increase the amount of the account payable to the supplier, and decrease an asset such as
inventory.
C. reduce the amount of the account payable to the supplier, and increase cash.
D. reduce the amount of the account payable to the supplier, and decrease cash.
14. A magazine publisher has an account called "Unearned Subscription Revenue." The
transaction that causes the balance of this account to decrease is:
A. cash is received from new subscribers.
B. magazines are printed for the publisher.
C. magazines are mailed to subscribers.
D. subscriptions are sold to new subscribers.
15. The adjusting entry to accrue Interest Expense results in:
A. an increase in Interest Expense.
B. a decrease in Interest Expense.
C. a decrease in Cash.
D. a decrease in Interest Payable.
7-5
16. Many current liabilities are affected by accrual accounting entries. This happens because:
A. liabilities are usually paid when they are incurred.
B. accrual accounting involves recognizing liabilities before they are paid.
C. the only way to reduce a liability account balance is with an adjusting entry.
D. accrual accounting frequently involves recognizing liabilities before they are incurred.
17. Which of the following is not usually associated with bonds?
A. Coupon rate.
B. Maturity value.
C. Face amount.
D. Maturity rate.
18. An Accounts Payable normally results from which of the following transactions?
A. Purchasing accounts for cash.
B. Purchasing property, plant and equipment on credit.
C. Purchasing goods and services from suppliers on credit.
D. All of these.
19. The current liability for Wages Payable (or Accrued Payroll) represents the:
A. gross pay earned by employees for which they have not yet been paid.
B. net pay earned by employees for which they have not yet been paid.
C. employer's federal and state payroll tax obligation.
D. employer's liability for various withholdings that taken out of the gross pay earned by
employees.
7-6
20. The financial leverage characteristic of long-term debt results in:
A. a reduction of the risk that creditors will not be paid.
B. a magnification of ROE relative to what it would be without long-term debt.
C. a magnification of ROI relative to what it would be without long-term debt.
D. the deductibility, for income tax purposes, of dividends to stockholders.
21. When a company issues a bond at a premium:
A. the company is more profitable than most companies in its industry.
B. investors perceive the bond to be a very safe investment.
C. the company's interest expense will be less than the interest paid each year.
D. the company's interest expense will be more than the interest paid each year.
22. Which of the following is not sometimes associated with bonds?
A. Debenture.
B. Callable.
C. Cumulative.
D. Convertible.
23. If the market price of a bond exceeds its face amount:
A. the coupon rate is less than the market interest rate.
B. the coupon rate is more than the market interest rate.
C. the company's ROI and working capital have been increasing over time.
D. the maturity rate has been declining.
7-7
24. The market value of a bond is the sum of the present value of future interest payments and
the present value of the amount to be repaid at maturity, discounted at:
A. the market rate.
B. the coupon rate.
C. the dividend rate.
D. the prime rate.
25. Financial leverage refers to which of the following?
A. The difference between the rate of return earned on assets (ROI) and the rate of return
earned on stockholders' equity (ROE).
B. The difference between the rate of return earned on current assets and the rate of return
earned on retained earnings.
C. The leverage a firm obtains from increasing production.
D. Decreasing fixed costs per unit by increasing production.
26. When a company issues a bond at a discount:
A. the company will pay less than the face amount of the bond at its maturity.
B. the company will pay more than the face amount of the bond at its maturity.
7-8
27. When bonds are issued at a premium:
A. interest expense on the bonds will be less than the interest paid.
B. interest expense on the bonds will be more than the interest paid.
C. the bonds are sold for less than their face amount.
D. the coupon interest rate is less than the market interest rate.
28. Which of the following is(are) a true statement(s) pertaining to bonds?
A. Bonds can be sold at a discount, par, or payable.
B. Bonds can be sold at a discount, par, or premium.
C. The SEC sets the market price of a bond.
D. The issuing firm sets the price of a bond.
29. Which of the following is true regarding bond discounts and/or premiums?
A. Bond discount is amortized but bond premium is not.
B. Bond premium is amortized but bond discount is not.
C. Neither bond discount nor premium is amortized.
D. Both bond discount and premium are amortized.
30. The amortization of bond discount:
A. increases the cash paid to bondholders for interest.
B. results in bond interest expense being greater than the interest paid to bondholders.
C. results in bond interest expense being less than the interest paid to bondholders.
D. reduces the carrying value of bonds payable on the balance sheet.
7-9
31. Southern Company's accountant failed to accrue as of 12/31/13 some employee fringe
benefit program expenses that were incurred in 2013 and that will be paid in 2014. The result
of this omission is to:
A. overstate the current ratio at 12/31/13 and overstate ROI and ROE for the year ended
12/31/13.
B. overstate the current ratio at 12/31/13 and understate ROI and ROE for the year ended
12/31/13.
C. understate the current ratio at 12/31/13 and understate ROI and ROE for the year ended
12/31/13.
D. not affect the current ratio at 12/31/13 but to overstate ROI and ROE for the year ended
12/31/13.
benefit program expenses that were incurred in 2013 and that will be paid in 2014. The result
of this omission is to:
A. overstate 2013 net income and understate noncurrent liabilities at 12/31/13.
B. understate 2013 expenses and understate current liabilities at 12/31/13.
C. understate 2013 expenses and overstate current liabilities at 12/31/13.
D. understate 2013 net income and overstate assets at 12/31/13.
33. The largest item of the Deferred Tax Liability for most companies is caused by:
A. providing the allowance for doubtful accounts for book purposes.
B. differences in inventory cost flow assumptions (FIFO vs. LIFO) for tax versus financial
accounting purposes.
C. differences in depreciation methods (accelerated vs. straight-line) for tax versus financial
D. amortizing bond premium or discount for tax purposes.
7-10
34. The noncurrent Deferred Tax Liability account arises because:
A. some book income will never be subject to income tax.
B. some expenses are deducted for tax purposes before they are deducted for book purposes.
C. income tax rates change from year to year.
D. the company has not paid income taxes currently due.
35. Many airlines have frequent flyer programs that permit travelers to accumulate credits that
can be applied to the cost of tickets for future flights. Most airlines recognize the cost of their
frequent flyer programs when the credits are used to purchase tickets. This practice, which
seems to ignore the matching concept, results in:
A. stating liabilities and expenses at appropriate amounts.
B. overstating liabilities and expenses.
C. understating liabilities and expenses.
D. understating liabilities and overstating expenses.
36. The liability for product warranty claims is an example of a liability that:
A. has been calculated using estimates.
B. has been recorded in the process of matching revenue and expense.
C. also resulted in a reduction of net income.
D. all of these.
7-11
37. The noncurrent liability, Noncontrolling Interest, arises if:
A. A firm owns less than 50% of another entity.
B. A firm owns more than 50%, but less than 100%, of another entity.
C. A firm owns 100% of another entity.
D. Noncontrolling Interest is accounted for as an equity item.
38. In consolidated financial statements:
A. the parent's and subsidiary's financial statements are reported on a separate basis.
B. the parent's and subsidiary's financial statements are reported on a combined basis.
C. financial statements are reported on an industry-wide basis.
D. None of these.
Essay Questions
7-12
39. On March 15, 2014, Birkshire Energy obtained a nine-month working capital loan from the
First National Bank of Oglesby. The face amount of the note signed by the treasurer was
$300,000. The interest rate charged by the bank was 10 percent. The bank made the loan on
a discount basis. (Round your final answers to the nearest dollar).
(a.) Calculate the loan proceeds made available to Birkshire.

(b.) Calculate the amount of interest expense related to this loan during the six months
ended June 30, 2014.
(c.) What is the amount of the current liability related to this loan to be shown in the June 30,
2014, balance sheet?
7-13
40. On September 30, 2014, David's Co.'s treasurer signed a note promising to pay $520,000 on
December 31, 2014. Proceeds of the note were $501,800.
(a.) Calculate the discount rate used by the lender.

(b.) Calculate the effective interest rate on the loan.
(c.) Write the journal entry to show the effect of recording interest expense for the month of
October.
41. Claudette, Inc., provides warranties for many of its products. The January 1, 2014, balance of
the Estimated Warranty Liability account was $38,500. Based on an analysis of warranty
claims during the past several years, this year's warranty provision was estimated to be 0.8
percent of sales. During 2014, the actual costs of servicing products under warranty were
$51,000, and sales were $5,300,000.
(a.) What amount of Warranty Expense will appear on the income statement for 2014?
(b.) What amount will be reported in the Estimated Warranty Liability account on the
December 31, 2014, balance sheet?
7-14
42. Assume that Wallywill, Inc. offered its customers, which are primarily retail stores who sell its
products, an advertising allowance equal to 8% of the amount of purchases from Wallywill
during December, if the retail store would spend the money for advertising in January.
Wallywill Inc.'s sales in December totaled $5,000,000, and it was expected that 70% of those
sales were made to retailers who would take advantage of the advertising allowance offer.
Write the journal entry or use the horizontal model to show the effect of the accrual that
should be made as of December 31 with respect to the advertising allowance offer.
7-15
43. The Defiance College sells season tickets for four home football games at a price of $30. For
the 2014 season, 5,000 season tickets were sold.
(a.) Write the journal entry or use the horizontal model to show the effect of the sale of the
season tickets.
(b.) Write the journal entry or use the horizontal model to show the effect of hosting a home
football game.
(c.) Where on the balance sheet would the account balance representing funds Received for
games not yet played be classified? Assume that The Defiance College follows the same
accounting and financial reporting procedures that are used in business.
7-16
44. At December 31, 2013, the end of the first year of operations at Xavion Inc., the firm's
accountant neglected to accrue payroll taxes of $27,700 that were applicable to payrolls for
the year then ended.
(a.) Write the journal entry or use the horizontal model to show the effect of the accrual that
should have been made as of December 31, 2013.
(b.) Determine the income statement and balance sheet effects of not accruing 2013 payroll
taxes at December 31, 2013 (assuming that the payroll taxes were not accrued, as originally
stated).
(c.) Assume that when the payroll taxes were paid in January 2014, the payroll tax expense
account was charged. Assume that at December 31, 2014, the accountant again neglected to
accrue the payroll tax liability, which was $20,400 at that date. Determine the income
statement and balance sheet effects of not accruing 2014 payroll taxes at December 31,
2014.
7-17
45. Ariel, Inc., issued $30 million face amount of 9% bonds when market interest rates were
9.30% for bonds of similar risk and other characteristics.
(a.) How much interest will be paid annually on these bonds?

(b.) Will the bonds be issued at a premium or discount? Explain your answer.
(c.) Will the annual interest expense on these bonds be more than, equal to, or less than, the
amount of interest paid each year? Explain your answer.
46. On April 15, 2014, Melissa purchased $30,000 of Verbecke Co.'s 12%, 20-year bonds at face
amount. Verbecke Co. has paid interest due on the bonds regularly. On April 15, 2018, market
interest rates had risen to 14% and Melissa is considering selling the bonds. Using the
present value tables in Chapter 6 of the textbook, calculate the market value of Melissa's
bonds on April 15, 2018.
7-18
47. Ariana Co. issued $2,000,000 face amount of 15%, 20-year bonds on April 1, 2014. The bonds
pay interest on a semi-annual basis on June 30 and December 31 each year.
(a.) Assume that market interest rates were slightly lower than 15% when the bonds were
sold. Would the proceeds from the bond issue have been more than, less than, or equal to the
face amount?
(b.) Independent of part (a), assume that the proceeds were $1,980,000. Write the journal
entry or use the horizontal model to show the effects of issuing the bonds.
(c.) Assume that the bonds were issued for $1,980,000 as in part (b). Calculate the interest
expense that Ariana Co. will show with respect to these bonds in its income statement for the
year ended December 31, 2014, assuming that the discount of $20,000 is amortized on a
straight-line basis.
7-19
Chapter 07 Accounting for and Presentation of Liabilities Answer Key
Multiple Choice Questions
1. A transaction that is likely to cause an increase in a current liability is:
A. payment of accrued wages.
B. accrual of interest expense.
C. depreciation of equipment.
D. accrual of bad debts expense.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Reporting
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 07-05 Discuss the importance of making estimates for certain accrued liabilities and show how these
items are presented in the balance sheet.
2. The payment of a current liability will:
A. decrease net income.
B. decrease working capital.
C. increase working capital.
D. not affect working capital.
AACSB: Analytic
AICPA FN: Reporting
Blooms: Remember
7-20
Difficulty: 1 Easy
Learning Objective: 07-01 Show the financial statement presentation of short-term debt and current maturities of long-
term debt.
3. A working capital loan will generally:
A. not have an interest rate.
B. require that interest (if any) be paid monthly.
C. not affect working capital.
D. be classified as a noncurrent liability.
AACSB: Analytic
AICPA FN: Decision Making
Blooms: Understand
Difficulty: 3 Hard
term debt.
4. Computing a borrower's effective interest rate is another application of which of the

following concepts?
A. Present value concept.
B. Current value concept.
C. Periodic interest concept.
D. None of these.
AACSB: Analytic
AICPA FN: Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 07-02 Illustrate the difference between interest calculated on a straight basis and on a discount
basis.
7-21
5. Which of the following is a true statement regarding interest calculation methods?
A. Interest is calculated on either a straight-basis or a delayed-basis.
B. Interest is calculated on either a straight-basis or an undiscounted-basis.
C. If a borrower receives a loan on a discount-basis, the APR will be less than the simple
interest.
D. If a borrower receives a loan on a discount-basis, the APR will be more than the simple
interest rate.
AACSB: Analytic
Blooms: Understand
Difficulty: 3 Hard
basis.
6. A loan discount is:
A. a loan used to purchase a bond at a discount.
B. a discount market interest rate on a loan.
C. the same as a bond discount.
D. None of these.
AACSB: Analytic
AICPA FN: Reporting
Blooms: Remember
basis.
7-22
7. Cassady, Inc. borrowed $5,000 for 3 months at an APR of 10%. The amount of interest paid
on this loan was:
A. $240.
B. $120.
C. $125.
D. $500.
AACSB: Analytic
Blooms: Apply
basis.
8. Bonner's, Inc. borrowed $12,000 for 4 months on a discount basis. The lender used an
interest rate of 8% to calculate the discount. The amount of cash Bonner's, Inc. actually
had available to use from this loan was:
A. $11,040.
B. $11,680.
C. $12,000.
D. $12,320.
AACSB: Analytic
Blooms: Apply
basis.
7-23
9. When borrowing money, the most important objective of the borrower should be to:
A. minimize monthly payments.
B. minimize the APR.
C. avoid borrowing on a discount basis.
D. make the maturity date as far in the future as possible.
AACSB: Analytic
AICPA FN: Decision Making
Blooms: Understand
basis.
10. Interest on a Note Payable is most appropriately accrued:
A. when the note is signed.
B. as of the end of each accounting period during which the note is a liability.
C. when principal payments on the note are made.
D. when the interest is paid.
AACSB: Analytic
AICPA FN: Reporting
Blooms: Understand
term debt.
7-24
11. Current maturities of long-term debt:
A. reflect overdue installments of bonds payable.
B. are classified with long-term debt.
C. represent cash that has been set aside for debt payments due within a year.
D. permit a more accurate determination of working capital.
AACSB: Analytic
Blooms: Understand
term debt.
12. The purpose of reporting Current Maturities of Long-Term debt is to:
A. report any portion of a long-term borrowing that is to be paid in the upcoming

accounting period as a current liability.
B. reclassify a portion of debt from the noncurrent section of the balance sheet to the
current section of the balance sheet.
C. properly classify liabilities.
D. all of these.
AACSB: Analytic
Blooms: Understand
term debt.
7-25
13. When a supplier makes a downward adjustment in the amount owed by a creditor, the
creditor will:
A. reduce the amount of the account payable to the supplier, and decrease an asset such
as inventory.
B. increase the amount of the account payable to the supplier, and decrease an asset
such as inventory.
C. reduce the amount of the account payable to the supplier, and increase cash.
D. reduce the amount of the account payable to the supplier, and decrease cash.
AACSB: Analytic
AICPA FN: Reporting
Blooms: Apply
term debt.
14. A magazine publisher has an account called "Unearned Subscription Revenue." The
transaction that causes the balance of this account to decrease is:
A. cash is received from new subscribers.
B. magazines are printed for the publisher.
C. magazines are mailed to subscribers.
D. subscriptions are sold to new subscribers.
AACSB: Analytic
Blooms: Understand
Difficulty: 3 Hard
Learning Objective: 07-03 Discuss what unearned revenues are and how they are presented in the balance sheet.
7-26
15. The adjusting entry to accrue Interest Expense results in:
A. an increase in Interest Expense.
B. a decrease in Interest Expense.
C. a decrease in Cash.
D. a decrease in Interest Payable.
AACSB: Analytic
AICPA FN: Reporting
Blooms: Remember
term debt.
16. Many current liabilities are affected by accrual accounting entries. This happens because:
A. liabilities are usually paid when they are incurred.
B. accrual accounting involves recognizing liabilities before they are paid.
C. the only way to reduce a liability account balance is with an adjusting entry.
D. accrual accounting frequently involves recognizing liabilities before they are incurred.
AACSB: Analytic
AICPA FN: Reporting
Blooms: Understand
term debt.
7-27
17. Which of the following is not usually associated with bonds?
A. Coupon rate.
B. Maturity value.
C. Face amount.
D. Maturity rate.
AACSB: Analytic
AICPA FN: Reporting
Blooms: Remember
Learning Objective: 07-07 Describe the different characteristics of a bond; which is the formal document representing
most long-term debt.
18. An Accounts Payable normally results from which of the following transactions?
A. Purchasing accounts for cash.
B. Purchasing property, plant and equipment on credit.
C. Purchasing goods and services from suppliers on credit.
D. All of these.
AACSB: Analytic
AICPA FN: Reporting
Blooms: Understand
term debt.
7-28
19. The current liability for Wages Payable (or Accrued Payroll) represents the:
A. gross pay earned by employees for which they have not yet been paid.
B. net pay earned by employees for which they have not yet been paid.
C. employer's federal and state payroll tax obligation.
D. employer's liability for various withholdings that taken out of the gross pay earned by
employees.
AACSB: Analytic
AICPA FN: Reporting
Blooms: Understand
Learning Objective: 07-04 Describe the accounting for an employer's liability for payroll and payroll taxes.
20. The financial leverage characteristic of long-term debt results in:
A. a reduction of the risk that creditors will not be paid.
B. a magnification of ROE relative to what it would be without long-term debt.
C. a magnification of ROI relative to what it would be without long-term debt.
D. the deductibility, for income tax purposes, of dividends to stockholders.
AACSB: Analytic
Blooms: Understand
Difficulty: 3 Hard
Learning Objective: 07-06 Explain what financial leverage is and how it is provided by long-term debt.
7-29
21. When a company issues a bond at a premium:
A. the company is more profitable than most companies in its industry.
B. investors perceive the bond to be a very safe investment.
AACSB: Analytic
Blooms: Understand
Difficulty: 3 Hard
Learning Objective: 07-08 Describe why bond discount or premium arises and how it is accounted for.
22. Which of the following is not sometimes associated with bonds?
A. Debenture.
B. Callable.
C. Cumulative.
D. Convertible.
AACSB: Analytic
AICPA FN: Reporting
Blooms: Remember
7-30
23. If the market price of a bond exceeds its face amount:
A. the coupon rate is less than the market interest rate.
B. the coupon rate is more than the market interest rate.
C. the company's ROI and working capital have been increasing over time.
D. the maturity rate has been declining.
AACSB: Analytic
AICPA FN: Reporting
Blooms: Understand
Difficulty: 3 Hard
24. The market value of a bond is the sum of the present value of future interest payments
and the present value of the amount to be repaid at maturity, discounted at:
A. the market rate.
B. the coupon rate.
C. the dividend rate.
D. the prime rate.
AACSB: Analytic
Blooms: Understand
7-31
25. Financial leverage refers to which of the following?
A. The difference between the rate of return earned on assets (ROI) and the rate of return
earned on stockholders' equity (ROE).
B. The difference between the rate of return earned on current assets and the rate of
return earned on retained earnings.
C. The leverage a firm obtains from increasing production.
D. Decreasing fixed costs per unit by increasing production.
AACSB: Analytic
Blooms: Understand
Difficulty: 3 Hard
Learning Objective: 07-06 Explain what financial leverage is and how it is provided by long-term debt.
26. When a company issues a bond at a discount:
A. the company will pay less than the face amount of the bond at its maturity.
B. the company will pay more than the face amount of the bond at its maturity.
AACSB: Analytic
AICPA FN: Reporting
Blooms: Understand
Difficulty: 3 Hard
7-32
27. When bonds are issued at a premium:
A. interest expense on the bonds will be less than the interest paid.
B. interest expense on the bonds will be more than the interest paid.
C. the bonds are sold for less than their face amount.
D. the coupon interest rate is less than the market interest rate.
AACSB: Analytic
AICPA FN: Reporting
Blooms: Understand
Difficulty: 3 Hard
28. Which of the following is(are) a true statement(s) pertaining to bonds?
A. Bonds can be sold at a discount, par, or payable.
B. Bonds can be sold at a discount, par, or premium.
C. The SEC sets the market price of a bond.
D. The issuing firm sets the price of a bond.
AACSB: Analytic
AICPA FN: Reporting
Blooms: Remember
7-33
29. Which of the following is true regarding bond discounts and/or premiums?
A. Bond discount is amortized but bond premium is not.
B. Bond premium is amortized but bond discount is not.
C. Neither bond discount nor premium is amortized.
D. Both bond discount and premium are amortized.
AACSB: Analytic
AICPA FN: Reporting
Blooms: Remember
30. The amortization of bond discount:
A. increases the cash paid to bondholders for interest.
B. results in bond interest expense being greater than the interest paid to bondholders.
C. results in bond interest expense being less than the interest paid to bondholders.
D. reduces the carrying value of bonds payable on the balance sheet.
AACSB: Analytic
AICPA FN: Reporting
Blooms: Understand
7-34
benefit program expenses that were incurred in 2013 and that will be paid in 2014. The
result of this omission is to:
A. overstate the current ratio at 12/31/13 and overstate ROI and ROE for the year ended
12/31/13.
B. overstate the current ratio at 12/31/13 and understate ROI and ROE for the year ended
12/31/13.
C. understate the current ratio at 12/31/13 and understate ROI and ROE for the year
ended 12/31/13.
D. not affect the current ratio at 12/31/13 but to overstate ROI and ROE for the year
ended 12/31/13.
AACSB: Analytic
AICPA FN: Reporting
Blooms: Analyze
Difficulty: 3 Hard
benefit program expenses that were incurred in 2013 and that will be paid in 2014. The
result of this omission is to:
A. overstate 2013 net income and understate noncurrent liabilities at 12/31/13.
B. understate 2013 expenses and understate current liabilities at 12/31/13.
C. understate 2013 expenses and overstate current liabilities at 12/31/13.
D. understate 2013 net income and overstate assets at 12/31/13.
AACSB: Analytic
AICPA FN: Reporting
Blooms: Analyze
7-35
33. The largest item of the Deferred Tax Liability for most companies is caused by:
A. providing the allowance for doubtful accounts for book purposes.
B. differences in inventory cost flow assumptions (FIFO vs. LIFO) for tax versus financial
C. differences in depreciation methods (accelerated vs. straight-line) for tax versus

financial accounting purposes.
D. amortizing bond premium or discount for tax purposes.
AACSB: Analytic
AICPA FN: Reporting
Blooms: Remember
Learning Objective: 07-09 Explain what deferred tax liabilities are and why they arise.
34. The noncurrent Deferred Tax Liability account arises because:
A. some book income will never be subject to income tax.
B. some expenses are deducted for tax purposes before they are deducted for book
purposes.
C. income tax rates change from year to year.
D. the company has not paid income taxes currently due.
AACSB: Analytic
AICPA FN: Reporting
Blooms: Understand
Difficulty: 3 Hard
Learning Objective: 07-09 Explain what deferred tax liabilities are and why they arise.
7-36
35. Many airlines have frequent flyer programs that permit travelers to accumulate credits
that can be applied to the cost of tickets for future flights. Most airlines recognize the cost
of their frequent flyer programs when the credits are used to purchase tickets. This
practice, which seems to ignore the matching concept, results in:
A. stating liabilities and expenses at appropriate amounts.
B. overstating liabilities and expenses.
C. understating liabilities and expenses.
D. understating liabilities and overstating expenses.
AACSB: Analytic
Blooms: Apply
36. The liability for product warranty claims is an example of a liability that:
A. has been calculated using estimates.
B. has been recorded in the process of matching revenue and expense.
C. also resulted in a reduction of net income.
D. all of these.
AACSB: Analytic
AICPA FN: Reporting
Blooms: Apply
7-37
37. The noncurrent liability, Noncontrolling Interest, arises if:
A. A firm owns less than 50% of another entity.
B. A firm owns more than 50%, but less than 100%, of another entity.
C. A firm owns 100% of another entity.
D. Noncontrolling Interest is accounted for as an equity item.
AACSB: Analytic
AICPA FN: Reporting
Blooms: Remember
Difficulty: 3 Hard
Learning Objective: 07-10 Explain what noncontrolling interest is; why it arises; and what it means in the balance sheet.
38. In consolidated financial statements:
A. the parent's and subsidiary's financial statements are reported on a separate basis.
B. the parent's and subsidiary's financial statements are reported on a combined basis.
C. financial statements are reported on an industry-wide basis.
D. None of these.
AACSB: Analytic
AICPA FN: Reporting
Blooms: Understand
Difficulty: 3 Hard
Learning Objective: 07-10 Explain what noncontrolling interest is; why it arises; and what it means in the balance sheet.
Essay Questions
7-38
39. On March 15, 2014, Birkshire Energy obtained a nine-month working capital loan from the
First National Bank of Oglesby. The face amount of the note signed by the treasurer was
$300,000. The interest rate charged by the bank was 10 percent. The bank made the loan
on a discount basis. (Round your final answers to the nearest dollar).
(a.) Calculate the loan proceeds made available to Birkshire.

(b.) Calculate the amount of interest expense related to this loan during the six months
ended June 30, 2014.
(c.) What is the amount of the current liability related to this loan to be shown in the June
30, 2014, balance sheet?
(a.) Discount basis means that interest is paid in advance.

Proceeds = Face amount of note - interest
= $300,000 - ($300,000 * 10% * 9/12) = $300,000 - $22,500 = $277,500
(b.) The note is dated March 15, 2014, or 3 ½ months before June 30, 2014.
Interest = $300,000 * 10% * 3.5/12 = $8,750
(c.) Current liability = Face amount - discount balance

= $300,000 - ($22,500 - $8,750) = $286,250
AACSB: Analytic
AICPA FN: Reporting
Blooms: Apply
basis.
7-39
40. On September 30, 2014, David's Co.'s treasurer signed a note promising to pay $520,000
on December 31, 2014. Proceeds of the note were $501,800.
(a.) Calculate the discount rate used by the lender.

(b.) Calculate the effective interest rate on the loan.
(c.) Write the journal entry to show the effect of recording interest expense for the month
of October.
(a.) Discount = Principal (maturity value) - Proceeds

= $520,000 - $501,800 = $18,200
Discount rate = Discount/(Principal * Time)
= $18,200/($520,000 * 3/12) = 14%
(b.) Effective rate = Discount/(Proceeds * Time)

= $18,200/($501,800 * 3/12) = 14.5%
AACSB: Analytic
Blooms: Apply
basis.
7-40
41. Claudette, Inc., provides warranties for many of its products. The January 1, 2014, balance
of the Estimated Warranty Liability account was $38,500. Based on an analysis of warranty
claims during the past several years, this year's warranty provision was estimated to be
0.8 percent of sales. During 2014, the actual costs of servicing products under warranty
were $51,000, and sales were $5,300,000.
(a.) What amount of Warranty Expense will appear on the income statement for 2014?
(b.) What amount will be reported in the Estimated Warranty Liability account on the
December 31, 2014, balance sheet?
AACSB: Analytic
Blooms: Apply
7-41
42. Assume that Wallywill, Inc. offered its customers, which are primarily retail stores who sell
its products, an advertising allowance equal to 8% of the amount of purchases from
Wallywill during December, if the retail store would spend the money for advertising in
January. Wallywill Inc.'s sales in December totaled $5,000,000, and it was expected that
70% of those sales were made to retailers who would take advantage of the advertising
allowance offer. Write the journal entry or use the horizontal model to show the effect of
the accrual that should be made as of December 31 with respect to the advertising
allowance offer.
Advertising expense = $5,000,000 * .70 * .08 = $280,000
* Note: Many other reasonably descriptive liability account titles are acceptable.
AACSB: Analytic
Blooms: Apply
7-42
43. The Defiance College sells season tickets for four home football games at a price of $30.
For the 2014 season, 5,000 season tickets were sold.
(a.) Write the journal entry or use the horizontal model to show the effect of the sale of the
season tickets.
(b.) Write the journal entry or use the horizontal model to show the effect of hosting a
home football game.
(c.) Where on the balance sheet would the account balance representing funds Received
for games not yet played be classified? Assume that The Defiance College follows the
same accounting and financial reporting procedures that are used in business.
AACSB: Analytic
AICPA FN: Reporting
Blooms: Apply
Difficulty: 1 Easy
7-43
44. At December 31, 2013, the end of the first year of operations at Xavion Inc., the firm's
accountant neglected to accrue payroll taxes of $27,700 that were applicable to payrolls
for the year then ended.
(a.) Write the journal entry or use the horizontal model to show the effect of the accrual
that should have been made as of December 31, 2013.
(b.) Determine the income statement and balance sheet effects of not accruing 2013
payroll taxes at December 31, 2013 (assuming that the payroll taxes were not accrued, as
originally stated).
(c.) Assume that when the payroll taxes were paid in January 2014, the payroll tax expense
account was charged. Assume that at December 31, 2014, the accountant again neglected
to accrue the payroll tax liability, which was $20,400 at that date. Determine the income
statement and balance sheet effects of not accruing 2014 payroll taxes at December 31,
2014.
AACSB: Analytic
AICPA FN: Reporting
Blooms: Apply
7-44
45. Ariel, Inc., issued $30 million face amount of 9% bonds when market interest rates were
9.30% for bonds of similar risk and other characteristics.
(a.) How much interest will be paid annually on these bonds?

(b.) Will the bonds be issued at a premium or discount? Explain your answer.
(c.) Will the annual interest expense on these bonds be more than, equal to, or less than,
the amount of interest paid each year? Explain your answer.
(a.) $30,000,000 * .09 = $2,700,000 interest paid annually.

(b.) The bonds were issued at a discount because market interest rates were more than
the coupon rate when the bonds were issued. Investors would not be willing to pay the full
face amount for bonds offering a lower than market rate of interest.
(c.) Interest expense will be more than the interest paid because the amortization of bond
discount will increase interest expense. Since the bonds were sold at a discount, less than
$30,000,000 in cash would be available for use by Ariel, Inc. throughout the life of the
bonds. As a result, the effective rate of interest used for determining interest expense
(9.30%) is more than the coupon rate (9%) used to determine cash interest payments.
AACSB: Analytic
AICPA FN: Reporting
Blooms: Apply
7-45
46. On April 15, 2014, Melissa purchased $30,000 of Verbecke Co.'s 12%, 20-year bonds at
face amount. Verbecke Co. has paid interest due on the bonds regularly. On April 15, 2018,
market interest rates had risen to 14% and Melissa is considering selling the bonds. Using
the present value tables in Chapter 6 of the textbook, calculate the market value of
Melissa's bonds on April 15, 2018.
The annual interest on the bonds = $30,000 * .12 = $3,600. The remaining term of the
bonds is 16 years. The present value of an annuity of $3,600 for 16 years at 14% is: $3,600
* 6.2651 = $22,554
The present value of the maturity value of $30,000 in 16 years at 14% is:
$30,000 * 0.1229 = $3,687
Market value of bonds = PV of interest + PV of maturity

= $22,554 + $3,687 = $26,241
AACSB: Analytic
Blooms: Apply
7-46
47. Ariana Co. issued $2,000,000 face amount of 15%, 20-year bonds on April 1, 2014. The
bonds pay interest on a semi-annual basis on June 30 and December 31 each year.
(a.) Assume that market interest rates were slightly lower than 15% when the bonds were
sold. Would the proceeds from the bond issue have been more than, less than, or equal to
the face amount?
(b.) Independent of part (a), assume that the proceeds were $1,980,000. Write the journal
entry or use the horizontal model to show the effects of issuing the bonds.
(c.) Assume that the bonds were issued for $1,980,000 as in part (b). Calculate the
interest expense that Ariana Co. will show with respect to these bonds in its income
statement for the year ended December 31, 2014, assuming that the discount of $20,000 is
amortized on a straight-line basis.
AACSB: Analytic
AICPA FN: Reporting
Blooms: Apply
Difficulty: 3 Hard
7-47

Accounting What The Numbers Mean 10th Edition Marshall Test Bank

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Accounting What The Numbers Mean 10th Edition Marshall Test Bank

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Accounting What the Numbers Mean

10th Edition Marshall Test Bank

Accounting for and Presentation of Liabilities

Multiple Choice Questions

1. A transaction that is likely to cause an increase in a current liability is:

A. payment of accrued wages.

B. accrual of interest expense.

D. accrual of bad debts expense.

2. The payment of a current liability will:

A. decrease net income.

B. decrease working capital.

C. increase working capital.

D. not affect working capital.

3. A working capital loan will generally:

A. not have an interest rate.

B. require that interest (if any) be paid monthly.

C. not affect working capital.

D. be classified as a noncurrent liability.

A. Present value concept.

B. Current value concept.

C. Periodic interest concept.

5. Which of the following is a true statement regarding interest calculation methods?

A. Interest is calculated on either a straight-basis or a delayed-basis.

B. Interest is calculated on either a straight-basis or an undiscounted-basis.

6. A loan discount is:

A. a loan used to purchase a bond at a discount.

B. a discount market interest rate on a loan.

C. the same as a bond discount.

A. minimize monthly payments.

B. minimize the APR.

C. avoid borrowing on a discount basis.

D. make the maturity date as far in the future as possible.

A. when the note is signed.

C. when principal payments on the note are made.

D. when the interest is paid.

11. Current maturities of long-term debt:

A. reflect overdue installments of bonds payable.

B. are classified with long-term debt.

D. permit a more accurate determination of working capital.

12. The purpose of reporting Current Maturities of Long-Term debt is to:

C. properly classify liabilities.

A. cash is received from new subscribers.

B. magazines are printed for the publisher.

C. magazines are mailed to subscribers.

D. subscriptions are sold to new subscribers.

15. The adjusting entry to accrue Interest Expense results in:

A. an increase in Interest Expense.

B. a decrease in Interest Expense.

D. a decrease in Interest Payable.

A. liabilities are usually paid when they are incurred.

B. accrual accounting involves recognizing liabilities before they are paid.

17. Which of the following is not usually associated with bonds?

A. Purchasing accounts for cash.

B. Purchasing property, plant and equipment on credit.

C. Purchasing goods and services from suppliers on credit.

C. employer's federal and state payroll tax obligation.

A. a reduction of the risk that creditors will not be paid.

B. a magnification of ROE relative to what it would be without long-term debt.

C. a magnification of ROI relative to what it would be without long-term debt.

D. the deductibility, for income tax purposes, of dividends to stockholders.

21. When a company issues a bond at a premium:

A. the company is more profitable than most companies in its industry.

B. investors perceive the bond to be a very safe investment.