- A firm’s current assets include $100,000 cash, $300,000
accounts receivable, and $400,000 inventory. The cur-
rent liabilities are $200,000. What are the current and
quick ratios?
A. 0.5, 2.0 C. 2.0, 4.0
B. 4.0, 0.5 D. 4.0, 2.0 - A company issues $200,000 of 10% bonds that pay interest
annually and have a five-year term. What will the selling
price and the discount or premium of the bonds be if the
market rate of interest is 9% on the date the bonds are is-
sued? Use the present value tables in Appendix A.
A. $129,986 selling price, $70,014 discount
B. $207,779 selling price, $7,779 premium
C. $207,779 selling price, $7,779 discount
D. $200,000 selling price, $7,779 discount- A firm reported net income before tax of $500,000 and
paid dividends of $200,000. The firm has $1,000,000 face
value 10% bonds outstanding. What is the number of
times interest charges are earned?
A. 3.0 C. 5.0
B. 4.0 D. 6.0
474 Chapter 10 Liabilities
DISCUSSION QUESTIONS
- What two types of transactions cause most current
liabilities? - When are short-term notes payable issued?
- The “Questions and Answers Technical Hotline” in the
Journal of Accountancyincluded the following question:
Several years ago, Company B instituted legal action
against Company A. Under a memorandum of set-
tlement and agreement, Company A agreed to pay
Company B a total of $17,500 in three installments—
$5,000 on March 1, $7,500 on July 1, and the re-
maining $5,000 on December 31. Company A paid
the first two installments during its fiscal year ended
September 30. Should the unpaid amount of $5,000
be presented as a current liability at September 30?How would you answer this question?- What programs are funded by the FICA (Federal
Insurance Contributions Act) tax? - For each of the following payroll-related taxes, indicate
whether it generally applies to (a) employees only, (b)
employers only, (c) both employees and employers:- Social Security tax
- Medicare tax
- Federal income tax
- Federal unemployment compensation tax
- State unemployment compensation tax
- To match revenues and expenses properly, should the
expense for employee vacation pay be recorded in the pe-
riod during which the vacation privilege is earned or
during the period in which the vacation is taken? Discuss. - What is interest? How does simple interest differ from
compound interest? - What key characteristics define an annuity? What is the
present value of a $500, three-year annuity, where the
first payment is received one year from today and the rel-
evant interest rate is 8%? Use the present value tables in
Appendix A. - What is discounting?
- Bill expects to receive $3,000 from his grandfather when
he graduates from college three years from today. What
is the present value of the $3,000 if the relevant interest
rate is 6% compounded anually? - Describe the two distinct obligations incurred by a cor-
poration when issuing bonds. - If you asked your broker to purchase for you a 6% bond
when the market interest rate for such bonds was 7%,
would you expect to pay more or less than the face
amount for the bond? Explain. - A corporation issues $10,000,000 of 6% bonds to yield in-
terest at the rate of 5%. (a) Was the amount of cash re-
ceived from the sale of the bonds greater or less than
$10,000,000? (b) Identify the following terms related to
the bond issue: (1) face amount, (2) market or effective
rate of interest, (3) contract rate of interest, and (4) matu-
rity amount. - If bonds issued by a corporation are sold at a premium,
is the market rate of interest greater or less than the con-
tract rate? - The following data relate to a $1,000,000, 6% bond issue
for a selected semiannual interest period:
Bond carrying amount at beginning of period $1,150,000
Interest paid at end of period 30,000
Interest expense allocable to the period 28,750(a) Were the bonds issued at a discount or at a premium?
(b) What is the unamortized amount of the discount or
premium account at the beginning of the period? (c) What
account was debited to amortize the discount or premium?- Would a zero-coupon bond ever sell for its face amount?
- Bonds Payable has a balance of $750,000, and Discount
on Bonds Payable has a balance of $12,500. If the issuing
corporation redeems the bonds at 99, is there a gain or
loss on the bond redemption? - When should the liability associated with a product war-
ranty be recorded? Discuss. - Hewlett-Packardreported $1,494 million of product war-
ranties in the current liabilities section of a recent balance
sheet. How would costs of repairing a defective product
be recorded? - How would you interpret a four-year trend in the current
ratio, which has declined from 2.0 to 0.50? - What is the number of times interest charges are earned
if the business has net income before taxes of $600,000
and a $1,500,000 face value bond payable with a coupon
rate of 10%?