Q: A company issues a $$100,000, 8%, 5-year bond at a price of 97$$,000. What is the journal entry to record the issuance of the bond?

Cash $$97,000 \n Discount on Bonds Payable 3$$,000 \n Bonds Payable $100,000

Q: Which formula correctly calculates the accounts payable turnover ratio?

$$\text{Accounts Payable Turnover} = \frac{\text{Cost of Goods Sold}}{\text{Average Accounts Payable}}$$

Q: A company estimates warranty expense at 2% of sales. If sales for the year are $500,000, what is the journal entry to record the warranty expense?

Warranty Expense $$10,000 \n Warranty Payable 10$$,000

Q: Which entry records the payment of a note payable and its accrued interest at maturity?

Notes Payable XX \n Interest Payable XX \n Cash XX

Q: Which formula correctly calculates the leverage ratio?

$$\text{Leverage Ratio} = \frac{\text{Total Assets}}{\text{Total Shareholders' Equity}}$$

Q: Which entry records the actual repair or replacement of defective merchandise under a warranty?

Estimated Warranty Payable XX \n Inventory XX

Question 1

Which of the following best describes a current liability?

Accepted Answer

An obligation due within the longer of one year or the company's normal operating cycle.

Question 2

A company issues a $$100,000, 8%, 5-year bond at a price of 97$$,000. What is the journal entry to record the issuance of the bond?

Accepted Answer

Cash $$97,000 
 Discount on Bonds Payable 3$$,000 
 Bonds Payable $100,000

Question 3

Which formula correctly calculates the accounts payable turnover ratio?

Accepted Answer

$$	ext{Accounts Payable Turnover} = \frac{	ext{Cost of Goods Sold}}{	ext{Average Accounts Payable}}$$

Question 4

A company estimates warranty expense at 2% of sales. If sales for the year are $500,000, what is the journal entry to record the warranty expense?

Accepted Answer

Warranty Expense $$10,000 
 Warranty Payable 10$$,000

Question 5

Which of the following is NOT a type of bond commonly issued by companies?

Accepted Answer

Equity bonds

Question 6

If a bond is issued at a premium, how does this affect the interest expense recorded each period?

Accepted Answer

Interest expense is less than the cash interest paid each period.

Question 7

Which entry records the payment of a note payable and its accrued interest at maturity?

Accepted Answer

Notes Payable XX 
 Interest Payable XX 
 Cash XX

Question 8

A company issues $$200,000 of 10-year, 6% bonds at a price of 210$$,000. What is the carrying value of the bonds on the balance sheet immediately after issuance?

Accepted Answer

$$210,000$$

Question 9

Which of the following is a disadvantage of financing with debt rather than equity?

Accepted Answer

Interest payments are required regardless of profitability.

Question 10

Which formula correctly calculates the leverage ratio?

Accepted Answer

$$	ext{Leverage Ratio} = \frac{	ext{Total Assets}}{	ext{Total Shareholders' Equity}}$$

Question 11

A contingent liability should be recorded in the financial statements when:

Accepted Answer

It is probable and the amount can be reasonably estimated.

Question 12

Which entry records the actual repair or replacement of defective merchandise under a warranty?

Accepted Answer

Estimated Warranty Payable XX 
 Inventory XX

Question 13

Which of the following best describes the effective interest method for amortizing bond discounts or premiums?

Accepted Answer

Interest expense is calculated as the carrying value of the bond multiplied by the market rate.

Question 14

A company issues $500,000 of 5-year, 7% bonds at a discount. What is the entry to record interest expense for one period using the effective interest method?

Accepted Answer

Interest Expense XX 
 Discount on Bonds Payable XX 
 Cash XX

Question 15

Which of the following is a reason why a company might choose to finance with bonds rather than issuing shares?

Accepted Answer

Interest payments on bonds are tax-deductible, reducing taxable income.

Question 16

Which formula correctly calculates the times interest earned ratio?

Accepted Answer

$$	ext{Times Interest Earned} = \frac{	ext{Income before interest and income taxes}}{	ext{Interest Expense}}$$

Question 17

A company issues $$250,000 of bonds at a premium. The premium is 10$$,000. What is the carrying value of the bonds on the balance sheet after issuance?

Accepted Answer

$$260,000$$

Question 18

Which of the following is a feature of a term loan?

Accepted Answer

It is typically arranged with a single lender and repaid over a specified period.

Question 19

Which of the following would most likely NOT be found as a liability on the balance sheet?

Accepted Answer

Unrealized holding gain on investments

Question 20

A company has $$1,000,000 in total assets and 400$$,000 in total shareholders' equity. What is its leverage ratio?

Accepted Answer

$$\frac{1,000,000}{400,000} = 2.5$$

Chapter 7: Liabilities – Financial Accounting Study Notes

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