general business data bank

101. A mortgage note payable with a fixed interest rate requires the borrower to make installment payments over the term of the loan. Each installment payment includes interest on the unpaid balance of the loan and a payment on the principal. With each installment payment, indicate the effect on the portion allocated to interest expense and the portion allocated to principal.

Portion Allocated Portion Allocated

to Interest Expense to Payment of Principal

a. Increases Increases

b. Increases Decreases

c. Decreases Decreases

d. Decreases Increases

102. The entry to record an installment payment on a long-term note payable is

a. Mortgage Payable

Cash

b. Interest Expense

Cash

c. Mortgage Payable

Interest Expense

Cash

d. Bonds Payable

Cash

103. Winter Company purchased a building on January 2 by signing a long-term $600,000 mortgage with monthly payments of $5,400. The mortgage carries an interest rate of 10 percent.

The entry to record the first monthly payment will include a

a. debit to the Cash account for $5,400.

b. credit to the Cash account for $5,000.

c. debit to the Interest Expense account for $5,000.

d. credit to the Mortgage Payable account for $5,400.

104. Horton Company purchased a building on January 2 by signing a long-term $480,000 mortgage with monthly payments of $4,400. The mortgage carries an interest rate of 10 percent. The amount owed on the mortgage after the first payment will be

a. $480,000.

b. $479,600.

c. $476,000.

d. $475,600.

105. Farris Company borrowed $800,000 from BankTwo on January 1, 2011 in order to expand its mining capabilities. The five-year note required annual payments of $208,349 and carried an annual interest rate of 9.5%.What is the amount of expense Farris must recognize on its 2012 income statement?

a. $76,000

b. $63,427

c. $56,206

d. $49,659

106. Farris Company borrowed $800,000 from BankTwo on January 1, 2011 in order to expand its mining capabilities. The five-year note required annual payments of $208,349 and carried an annual interest rate of 9.5%.What is the balance in the notes payable account at December 31, 2012?

a. $800,000

b. $522,729

c. $667,651

d. $648,000

107. The lessee has substantially all of the benefits and risks of ownership in a(n)

a. apartment lease.

b. capital lease.

c. operating lease.

d. operating lease and a capital lease.

108. A lease where the intent is temporary use of the property by the lessee with continued ownership of the property by the lessor is called

a. off-balance sheet financing.

b. an operating lease.

c. a capital lease.

d. a purchase of property.

109. Which of the following is not a condition which would require the recording of a lease contract as a capital lease?

a. The lease transfers ownership of the property to the lessee.

b. The lease contains a bargain purchase option.

c. The lease term is less than 75% of the economic life of the leased property.

d. The present value of the lease payments equals or exceeds 90% of the fair market value of the leased property.

110. In a lease contract,

a. the owner of the property is called the lessee.

b. the presence of a bargain purchase option indicates that it is a capital lease.

c. the renter of the property is called the lessor.

d. there is always a transfer of ownership at the end of the lease term.

111. Which of the following statements concerning leases is true?

a. Capital leases are favored by lessees.

b. The appearance of the account, Leased Asset, on the balance sheet, signifies an operating lease.

c. The portion of a lease liability expected to be paid in the next year is reported as a current liability.

d. Present value is irrelevant in accounting for leases.

112. If the present value of lease payments equals or exceeds 90% of the fair market value of the leased property, the

a. conditions are met for the lease to be considered a capital lease.

b. lease is uneconomical and should not be entered into.

c. lease may be classified as an operating lease.

d. recording of a lease liability is optional—that is, the off-balance sheet approach can be elected.

113. Each of the following may be shown on a supporting schedule instead of on the balance sheet except the

a. current maturities of long-term debt.

b. conversion privileges.

c. interest rates.

d. maturity dates.

114. The times interest earned ratio is computed by dividing

a. net income by interest expense.

b. income before income taxes by interest expense.

c. income before interest expense by interest expense.

d. income before income taxes and interest expense by interest expense.

115. The discount on bonds payable or premium on bonds payable is shown on the balance sheet as an adjustment to bonds payable to arrive at the carrying value of the bonds. Indicate the appropriate addition or subtraction to bonds payable:

Premium on Discount on

Bonds Payable Bonds Payable

a. Add Add

b. Deduct Add

c. Add Deduct

d. Deduct Deduct

116. In a recent year Joey Corporation had net income of $140,000, interest expense of $40,000, and tax expense of $20,000. What was Joey Corporation’s times interest earned ratio for the year?

a. 5.00

b. 4.00

c. 3.50

d. 3.00

117. In a recent year Cold Corporation had net income of $250,000, interest expense of $50,000, and a times interest earned ratio of 9. What was Cold Corporation’s income before taxes for the year?

a. $500,000

b. $450,000

c. $400,000

d. None of the above.

118. The adjusted trial balance for Lamar Corp. at the end of the current year, 2012, contained the following accounts.

5-year Bonds Payable 8% $1,600,000

Interest Payable 50,000

Premium on Bonds Payable 150,000

Notes Payable (3 mo.) 40,000

Notes Payable (5 yr.) 145,000

Mortgage Payable ($15,000 due currently) 300,000

Salaries and Wages Payable 18,000

Taxes Payable (due 3/15 of 2013) 25,000

The total long-term liabilities reported on the balance sheet are

a. $2,045,000.

b. $2,100,000.

c. $2,195,000.

d. $2,180,000.

119. The 2012 financial statements of Marker Co. contain the following selected data (in millions).

Current Assets $ 75

Total Assets 140

Current Liabilities 40

Total Liabilities 95

Cash 8

The debt to total assets ratio is

a. 67.9%.

b. 96.4%.

c. 28.6%.

d. 256%.

^a120. The present value of a bond is also known as its

a. face value.

b. market price.

c. future value.

d. deferred value.

^a121. $3 million, 8%, 10-year bonds are issued at face value. Interest will be paid semi-annually. When calculating the market price of the bond, the present value of

a. $240,000 received for 10 periods must be calculated.

b. $3 million received in 10 periods must be calculated.

c. $3 million received in 20 periods must be calculated.

d. $120,000 received for 10 periods must be calculated.

^a122. Either the straight-line method or the effective-interest method of amortization will always result in

a. the same amount of interest expense being recognized over the term of the bonds.

b. the same amount of interest expense being recognized each year.

c. more interest expense being recognized than if premium or discounts were not amortized.

d. the same carrying value each year during the term of the bonds.

^a123. A corporation issued $600,000, 10%, 5-year bonds on January 1, 2012 for $648,666, which reflects an effective-interest rate of 8%. Interest is paid semiannually on January 1 and July 1. If the corporation uses the effective-interest method of amortization of bond premium, the amount of bond interest expense to be recognized on July 1, 2012, is

a. $30,000.

b. $24,000.

c. $32,434.

d. $25,946.

^a124. A bond discount must

a. always be amortized using straight-line amortization.

b. always be amortized using the effective-interest method.

c. be amortized using the effective-interest method if it yields annual amounts that are materially different than the straight-line method.

d. be amortized using the straight-line method if it yields annual amounts that are materially different than the effective-interest method.

^a125. When the effective-interest method of bond discount amortization is used,

a. the applicable interest rate used to compute interest expense is the prevailing market interest rate on the date of each interest payment date.

b. the carrying value of the bonds will decrease each period.

c. interest expense will not be a constant dollar amount over the life of the bond.

d. interest paid to bondholders will be a function of the effective-interest rate on the date the bonds are issued.