Practice Problems — Liabilities:1.When the stated interest rate exceeds the market rate, bonds are issued at ?
When the stated interest rate exceeds the market rate, bonds are issued at
a. a discount
b. a premium
c. coupon rate
d. prime
e. the margin
If the coupon rate is 7% and a bond is issued to yield 10%, it will be sold at
a. a discount
b. a premium
c. par value
d. the coupon rate
Which of the following is true?
a. A bond selling for an amount above face value is said to be selling at a discount
b. A bond will sell at a discount when the market rate is greater than the coupon rate
c. A bond selling for an amount below maturity value is said to be selling at a premium
d. A bond will sell at a premium when the market rate is greater than the coupon rate
According to U.S. GAAP, which criteria must be met in order to recognize a contingent liability in the balance sheet?
a. The obligation is certain to require payment at some point in the future
b. The obligation is probable
c. The obligation is estimable
d. The obligation is reasonably possible
e. both B and C
On January 1, 2013, Jennings, Inc. issued $1,000,000, 8-year, 12% bonds for $1,108,376. The bonds pay interest semiannually. The market rate is 10%. How much is the interest expense on the bonds for the first interest payment on June 30, 2013?
a. $60,000
b. $66,502
c. $55,419
d. $50,000
The Nigerian Barge transaction carried out by Enron involved
a. Shipping bricks
b. Using lease accounting to keep debt off the balance sheet
c. Treating a collateralized loan as a sale in order to keep debt off the balance sheet
d. Classifying current period operating expenses as capital expenditures
Which of the following does not represent a current liability?
a. Accrual of taxes payable
b. Short-term loan
c. Advance payments received from customers
d. Bond payable
Copper Industries plans to issue 8-year, 8%, $100,000 bonds paying interest on an annual basis, at a $2,000 premium. Which one of the following statements is true?
a. The cash paid to bondholders will be $2,000 each interest period.
b. Copper will receive $98,000 as the issue price.
c. Copper’s annual interest expense on the bonds will be less than the amount of interest paid to the bondholders each year.
d. Copper’s annual interest expense on the bonds will be greater than the amount of interest paid to the bondholders each year.
A contingent liability is an obligation that depends on the occurrence of a future event and that should be recorded in the accounts:
a. If the related future event will probably occur
b. If the amount is due in cash within one year
c. If the amount is reasonably estimated
d. Both A and C
e. None of the above
A contingent liability is an obligation that should be:
a. Disclosed in a footnote to the balance sheet when the contingency is not significant
b. Recorded in the balance sheet if the amount can be reasonably estimated and it is probable that the future event creating the obligation will occur
c. Classified in the owners’ equity section of the balance sheet when the future event creating the liability is not likely to occur
d. Recorded in the accounts and classified in a contingent liabilities section of the balance sheet between current liabilities and long-term liabilities
e. None of the above
Which of the following is false?
a. A contingent liability is an obligation that may develop from an existing situation depending on the occurrence of a future event.
b. A contingent liability that will probably occur should be recorded in the accounts even though the amount cannot be reasonably estimated.
c. Lawsuits and credit guarantees are examples of contingent liabilities.
d. Contingent liabilities that are remote do not have to be disclosed in the financial statements, even in a footnote.
What does the current ratio measure?
a. Solvency
b. Profitability
c. Short-term debt paying ability
d. Leverage
Moonshine Company issues $500,000 of 8% coupon bonds that pay interest semiannually and mature in 10 years. The bonds’ market interest rate is 6% per year compounded semiannually. How much cash did the company receive when they issued the bonds?
a. $574,389
b. $500,000
c. $436,550
d. $626,840
Using the American Science and Engineering financial statements at the end of this document, compute the current ratio as of March 31, 2015 (rounded to the nearest decimal):
a. 4.3
b. 2.2
c. 9.1
d. 1.3
Using the American Science and Engineering financial statements at the end of this document, compute the quick ratio as of March 31, 2015 (rounded to the nearest two decimals):
a. 1.82
b. 2.45
c. 2.95
d. 2.36