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BUAD 203
Practice Final Exam (New Material Only)
Choose the best answer
1. Assume that Warnaco Group Inc. borrowed $100,000 from the bank to be repaid over the next five
years, with principal payments beginning next month. Which of the following
best describes the presentation of this debt in the balance sheet as of today (the date of
borrowing)?
A. $100,000 in the long-term liability section.
B. $100,000 plus the interest to be paid over the five-year period in the long-term liability section.
C. A portion of the $ 100,000 in the current liability section, and the remainder of the principal in
the long-term liability section.
D. A portion of the $100,000 plus interest in the current liability section, and the remainder of the
principal plus interest in the long-term liability section.
2. Assume that Speedo International received $400,000 cash by signing a long-term promissory note.
They are required to make cash interest payments on April 30 and October 31 at an annual rate of
6%. Assuming a 12/31 year end, which of the following journal entries would be required at
December 31.
A. Interest Expense 4,000
Interest Payable 4,000
B. Interest Expense 4,000
Cash 4,000
C. Interest Expense 4,000
Interest Payable 8,000
Cash 12,000
D. Interest Expense 8,000
Interest Payable 4,000
Cash 12,000
3. Which of the following does not impact the cash interest payments to be made to bondholders?
A. Face value of the bond
B. Stated interest rate of the bond
C. Market interest rate
D. The number of payments per year
4. Which of the following is false when bonds are issued at a premium?
A. The bond will have an issue price for an amount above face value
B. Interest expense will exceed the cash payments
C. The market interest rate is lower than the stated interest rate
D. The cash payment will be unaffected by the premium
BUAD 203 Fall 2019
Practice Final Exam (New Material Only)
5. To determine if a bond will be issued at a premium or discount, or at face value, one must know
which of the following pairs of information?
A. The face value of the bond and the stated interest rate.
B. The face value and the market interest rate
C. The stated interest rate and the market interest rate on the date the bonds were issued
D. You can’t tell without having more pieces of information
6. Big Hitter Corp is facing a class-action lawsuit in the upcoming year. It is probable the company will
have to pay a settlement of $2,000,000 in the upcoming year. How would this fact be reported, if it
all, in the financial statements at the end of the current year?
A. A loss is immediately recognized on the income statement and a liability is recorded on the
balance sheet.
B. The item is a contingent liability and therefore is not presented in the financial statements
C. The item is presented as a liability on the balance sheet, no gain or loss is recognized because
the settlement has not yet been paid.
D. Only a note is made in the financial statements for the item since it is only probable and not
certain.
7. Failure to make a necessary adjusting entry for accrued interest on a note payable would result in
which of the following?
A. An understatement of both liabilities and stockholders' equity.
B. Net income to be overstated and assets to be understated.
C. Net income to be understated and liabilities to be understated.
D. An overstatement of net income, an understatement of liabilities, and an overstatement of
stockholders' equity.
8. Which of the following statements is incorrect?
A. The currently maturing portion of long-term debt must be classified as a current liability.
B. The non-current portion of long-term debt will remain reported as a long-term liability.
C. Debt is classified as long- or short-term based on the final maturity date, regardless of when
intermediate cash payments are due.
D. The currently maturing portion of long-term debt is a current liability if it is due within the
longer of one-year or the operating cycle.
9. Which feature is not typically applicable to common stock ownership?
A. Right to receive dividends before preferred stock shareholders
B. Right to vote for members of the board of directors
C. Right to receive residual assets of the company should it cease operations
D. All of the above
BUAD 203 Fall 2019
Practice Final Exam (New Material Only)
10. Which of the following about stock splits is true?
A. Stock splits are reported on the income statement
B. Stock splits increase total stockholder’s equity
C. Stock splits decrease total stockholder’s equity
D. None of the above
11. If the balance in Prepaid Expenses increased during the year, what action should be taken on the
statement of cash flows when following the indirect method, and why?
A. The change in the account balance should be subtracted from net income, because the net
increase in Prepaid Expenses did not impact net income but did reduce the cash balance.
B. The change in the account balance should be added to net income, because the net increase in
Prepaid Expenses did not impact net income but did increase the cash balance.
C. The net change in Prepaid Expenses should be subtracted from net income, to reverse the
income statement effect that had no impact on cash.
D. The net change in Prepaid Expenses should be added to net income, to reverse the income
statement effect that had no impact on cash.
12. The total change in cash as shown near the bottom of the statement of cash flows for the year
should agree with which of the following?
A. The difference in retained earnings when reviewing two years of balance sheets
B. Net income or loss as found on the income statement
C. The difference in cash when comparing two years of balance sheets
D. None of the above
13. RKJ Company has provided the following:
• 100,000 shares of $5 par value common stock are authorized;
• 70,000 shares have been issued;
• 55,000 shares are outstanding.
Which of the following statements is correct?
A. RKJ has 35,000 shares of treasury stock.
B. RKJ has 30,000 shares of treasury stock.
C. RKJ has 15,000 shares of treasury stock.
D. None of the above.
14. When treasury stock is purchased with cash, what is the impact on the balance sheet equation?
A. No change: The reduction of the asset cash is offset with the addition of the asset treasury
stock.
B. Assets decrease and stockholders’ equity increases.
C. Assets increase and stockholders’ equity decreases.
D. Assets decrease and stockholders’ equity decreases.
BUAD 203 Fall 2019
Practice Final Exam (New Material Only)
15. A company issued 100,000 shares of stock with a par value of $1 per share. The stock sold for $20
per share. By what amount will stockholders’ equity increase?
A. $100,000
B. $2,000,000
C. $1,900,000
D. No change
BUAD 203 Fall 2019
Practice Final Exam (New Material Only)
Equity
On January 1, 2018, the stockholders' equity section of Gibbons Corporation's balance sheet reported
the following:
Common stock, par $10, 100,000 authorized, 10,000 issued $100,000
Additional paid in capital 50,000
Retained earnings 160,000
During 2018, the following selected transactions occurred (assume they occurred in the order given):
(1) Announced a 2-for-1 stock split.
(2) 200 shares of treasury stock were purchased at $11 per share.
(3) Declared and paid a cash dividend of $19,800.
(4) Net income was $30,000.
Prepare the stockholders' equity section of the balance sheet as of December 31, 2018
BUAD 203 Fall 2019
Practice Final Exam (New Material Only)
Bond Payable
On January 1, 2018, Brunswick Corporation issued 100, 3-year bonds with a stated rate of 12%. At the
time of issuance, similar bonds had an interest rate of 10%. Assume coupon payments every six months
and a $1,000 face value per bond. Prepare a journal entry for the bond issuance on 1/1/2018 and the
final two journal entries required on December 31st of 2020.