Q: Under the effective interest amortization method, how is the interest expense for a period calculated?

Carrying amount of bond $ \times $ market rate

Question 1

A company purchases inventory costing $8,000 by issuing a one-year, 10% short-term note payable. What is the total amount of interest expense that will be recognized over the life of the note?

Accepted Answer

$8000 	imes 10\% = $800$

Question 2

Home Depot makes cash sales totaling $200,000 and collects an additional 5% in sales tax. What is the correct journal entry to record the day's sales?

Accepted Answer

Debit Cash $210,000; Credit Sales Revenue $200,000; Credit Sales Tax Payable $10,000

Question 3

Which of the following is NOT considered a payroll liability?

Accepted Answer

Sales Tax Payable

Question 4

Wortham Publishing sold a one-year subscription for $2,400 plus 9% sales tax. What is the total cash received at the time of sale?

Accepted Answer

$2,400 	imes 1.09 = $2,616$

Question 5

A company estimates that 3% of its $100,000 sales will require warranty repairs. What is the correct journal entry to record the estimated warranty expense?

Accepted Answer

Debit Warranty Expense $3,000; Credit Estimated Warranty Payable $3,000

Question 6

If a contingent liability is probable and the amount can be reasonably estimated, what is the appropriate accounting treatment?

Accepted Answer

Accrue the liability in the financial statements

Question 7

A company issues $100,000 of 9% five-year bonds when the market interest rate is 10%. The bonds are issued at $96,149. What is the amount of bond discount?

Accepted Answer

$100,000 - $96,149 = $3,851$

Question 8

Which method divides the total bond discount or premium into equal periodic amounts over the bond's term?

Accepted Answer

Straight-Line Amortization Method

Question 9

A $1,000 face value bond is quoted at 101.5. What is the amount received by the issuer?

Accepted Answer

$1,000 	imes 1.015 = $1,015$

Question 10

If the stated interest rate on a bond is 8% and the market rate is 6%, at what price will the bond be sold?

Accepted Answer

At a premium

Question 11

Which of the following statements about bond premium and discount is TRUE?

Accepted Answer

At maturity, the carrying amount of the bond equals the face value regardless of premium or discount

Question 12

Southwest Airlines issues $50,000 of 9% bonds at par. What is the semiannual interest payment?

Accepted Answer

$50,000 	imes 4.5\% = $2,250$

Question 13

When a company pays off bonds at maturity, which accounts are affected?

Accepted Answer

Debit Bonds Payable; Credit Cash

Question 14

A company issues $100,000 of 9% bonds at a premium when the market rate is 8%. The issue price is $104,100. What is the carrying value of the bonds at issuance?

Accepted Answer

$104,100

Question 15

Under the effective interest amortization method, how is the interest expense for a period calculated?

Accepted Answer

Carrying amount of bond $ \times $ market rate

Question 16

Which of the following best describes the accounting treatment for a contingent liability that is reasonably possible?

Accepted Answer

Disclose in the notes to the financial statements

Question 17

A company estimates warranty expense at 3% of sales. If actual warranty claims are less than the estimate, what happens to the Estimated Warranty Payable account?

Accepted Answer

It will have a credit balance

Question 18

Which of the following is reclassified from long-term to current on the balance sheet as it becomes due within one year?

Accepted Answer

Current portion of long-term debt

Question 19

A company issues $100,000 of 9% bonds at a discount. Using the straight-line method, what is the periodic discount amortization if the total discount is $3,851 and there are 10 semiannual periods?

Accepted Answer

$3,851 \div 10 = $385.10$

Question 20

Which of the following is TRUE regarding the carrying amount of a bond issued at a premium?

Accepted Answer

It decreases over time as the premium is amortized

Liabilities: Current, Contingent, and Long-Term (Bonds) – Financial Accounting Study Notes

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