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On January 1, Year 1, a $100,000 bond with a 5% annual stated rate is issued at 94 to yield an effective rate of 7%. Interest payments are made each December 31. If the effective interest method is applied, how much interest expense is recognized in Year 1?
Interest expense is calculated by taking the beginning period carrying value by the yield rate. A $100K bond issued at 94 has a beginning carrying value of $94K. Thus, the interest expense for Year 1 is $94K x 7%.
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On January 2, Year 1, Beanstock Corporation offers to sell a $100,000 bond coming due in 10 years. The bond pays interest of 4% at the end of each year. Beanstock finds a buyer who wants to earn 7% each year, and agrees to the 7% rate at a sales price of $80,000. On the December 31, Year 1 balance sheet, what amount is reported for the liability of this bond?
The beginning carrying value of the bond is its purchase price of $80K. Interest expense for Year 1 is the carrying value of $80K x the yield rate of 7% = $5,600. The carrying value of the bond increases by the amount of the interest expense to $85,600.
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A $100,000 bond payable is issued on July 1, Year 2, at 106. The bond comes due in exactly 5 years. The bond pays interest of 10% per year with payments every January 1st and July 1st. If the straight-line method is used, what amount should be reported for the liability as of December 31, Year 2?
Under the straight line method, the difference between the carrying value and the face value is amortized evenly over the life of the bond. Here, the premium of $6K is amortized evenly over 5 years, at $1,200 per year. 6 months have gone by since the sale of the bond, so the carrying value of $106K is reduced by $600 ($1,200 x 6/12 months).
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Of the following which is a cost associated with exit and disposal activities?
Costs to relocate employees are costs associated with exit and disposal activities.
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Which of the following is generally associated with payables classified as A/P? A) Periodic payment of interest B) Secured by collateral
Neither are generally associated with payables classified as A/P. A liability that is secured by collateral should be classified as a loan payable.
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The process of accounting for a discount or premium on bonds until their maturity is known as:
Bonds will likely demonstrate issuance at a discount or premium, and the process of returning the bond to its original value is known as amortization.
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The board of Directors for the Steak Corporation declares a $3 per share cash dividend on November 1, Year 5, to be paid to owners on record at November 15, Year 5. Checks will be distributed on November 29, Year 5. Prior to declaring the dividend, Steak Corporation has 150,000 shares outstanding and held 25,000 shares of treasury stock. On November 23, Year 5, Steak bought back an additional 15,000 shares of treasury stock. On what date should Steak reduce their working capital for this dividend?
Working capital is reduced on the date the dividend is declared.
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A company issues 15,000 shares of its $10 par value common stock at $18 per share. Later, 3,000 of these shares are bough back as treasury stock at a cost of $20 per share. Which of the following is true?
The impact on total stockholder's equity will be the same no matter what method is used to account for the treasury stock purchase. However, each method will impact accounts with stockholder's equity differently.
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The Marine Company has 200,000 common shares issued and outstanding. The stock was issued several years ago at a price above the $20 par value per share. During the current year, the board of directors declared a 30% stock dividend when the price of the shares was $45 per share. What reduction is recorded in the amount of retained earnings as a result of this dividend?
Because this is considered a large stock dividend, retained earnings must be adjusted for this stock dividend. The entry is calculated using the number of shares outstanding and the par value. Thus, the debit to retained earnings is 200K shares x 30% x $20 per share.
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Of the following is not a criteria for recognizing a liability associated with exit or disposal activities?
An entity's commitment to an exit or disposal plan, is not enough to result in liability recognition.
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At year end, ABC company estimates that its employees have earned vacation pay of $50,000. Employees will receive their vacation pay in year 2. Should ABC accrue a liability at year end if the rights to this compensation accumulated over time or if the rights are vested?
Employees compensation for future absences should be accrued if: Services have already been rendered, the obligation relates to vested or accumulated rights, the amount can be reasonable estimated, and payment is probable.
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A bond that matures in installments is known as a:
Serial bonds do not all mature at the same date and mature in installments. Debentures are unsecured bonds, term bonds have a single maturity date, and a bond sinking fund is used to pay off a bond at maturity.
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The Mohawk Company borrows $5 million and is required to sign a debt covenant as a condition of taking out the loan. Which of the following is least likely to be required by the debt covenant?
Debt covenants typically place restrictions and requirements on working capital, not company operations.
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The Barry Company borrows on a note payable and is subject to a debt covenant that requires it to maintain a certain level of working capital. In July of Year 1, Barry's working capital requirements fall below the level acceptable by its lender. Which of the following actions could the lender most likely take in response to this?
If debt covenants are met, lenders have many options, but the most likely action they would take is to immediately call the entire balance due.
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First Lender Bank requires all corporate borrowers to maintain a current ratio of .9, or they will be considered out of compliance with the terms of their loan and the full outstanding balance could be called immediately. One of its borrowers, the Stone Company, has current assets of $150,000 and current liabilities of $200,000. Another borrower, the Concrete Company, has current assets of $75,000 and current liabilities of $90,000. Which of these companies is in compliance with First Lender's debt covenant?
The current ratio is calculated as current assets divided by current liabilities. For Stone Company, the current ratio is $150K/$200K = .75. For Concrete Company, the current ratio is $75K/$90K = .833. Neither company is in compliance because both have ratios below .9.
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A property dividend should be recorded in retained earnings at the property's:
A property dividend should be recorded in retained earnings at the property's market value at date of declaration.
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How would a stock dividend affect assets, equity, and retained earnings?
There is no net effect to equity as all transfers take place within equity. There is no effect to assets and only a decrease to retained earnings.
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Additional paid in capital would be utilized in recording gains from _______ transactions.
APIC is an account used to track the gains and decrease in gains from purchasing and reselling treasury stock.
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