Accounting 202 Chapter 11 Test

ACCOUNTING 202
CHAPTER 11
TRUE-FALSE STATEMENTS
1.
All liabilities must be paid out of current earnings.
2.
Current liabilities are expected to be paid within one year or the operating cycle, whichever is
longer.
3.
The relationship between current liabilities and current assets is important in evaluating a
company's ability to pay off its long-term debt.
4.
A company should try to keep its current ratio as high as possible.
5.
Notes payable usually require the borrower to pay interest.
6.
Notes payable are often used instead of accounts payable.
7.
Accounts payable are usually interest-bearing.
8.
A $15,000, 8%, 9-month note payable requires an interest payment of $900 at maturity.
9.
Most notes are not interest bearing.
10.
With an interest-bearing note, the amount of cash received upon issuance of the note generally
exceeds the note's face value.
MULTIPLE CHOICE QUESTIONS

11.
Most companies pay current liabilities

a. out of current assets.
b. by issuing interest-bearing notes payable.
c. by issuing stock.
d. by creating long-term liabilities.
12.
A current liability is a debt that can reasonably expected to be paid

a. within one year.
b. between 6 months and 18 months.
c. out of currently recognized revenues.
d. out of cash currently on hand.
Use the following information for questions 13-15.

Chase County Bank agrees to lend Agler Brick Company $300,000 on January 1. Agler Brick Company
signs a $300,000, 8%, 9-month note.
13.
The entry made by Agler Brick Company on January 1 to record the proceeds and issuance of the
note is
a. Interest Expense ......................................................................................
18,000
Cash. ....................................................................................................... 282,000
Notes Payable ...............................................................................
300,000
b.
Cash .......................................................................................................
Notes Payable ...............................................................................
300,000
300,000
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c.
d.
Cash .......................................................................................................
Interest Expense ......................................................................................
Notes Payable ...............................................................................
Cash .......................................................................................................
Notes Payable ...............................................................................
Interest Payable ............................................................................
300,000
18,000
318,000
300,000
18,000
300,000
18,000
14.
What is the adjusting entry required if Agler Brick Company prepares financial statements on June
30?
a. Interest Expense ......................................................................................
12,000
Interest Payable ............................................................................
12,000
b. Interest Expense ......................................................................................
12,000
Cash ..............................................................................................
12,000
c. Interest Payable .......................................................................................
12,000
Cash ..............................................................................................
12,000
d. Interest Payable .......................................................................................
12,000
Interest Expense ...........................................................................
12,000
15.
What entry will Agler Brick Company make to pay off the note and interest at maturity assuming
that interest has been accrued to September 30?
a. Notes Payable ..........................................................................................
318,000
Cash ..............................................................................................
318,000
b. Notes Payable ..........................................................................................
300,000
Interest Payable .......................................................................................
18,000
Cash ..............................................................................................
318,000
c. Interest Expense ......................................................................................
18,000
Notes Payable ..........................................................................................
300,000
Cash ..............................................................................................
318,000
d. Interest Payable .......................................................................................
12,000
Notes Payable ..........................................................................................
300,000
6,000
Cash ..............................................................................................
318,000
The interest expense on a $1,000, 4%, 3-month note is
a. $10
b. $40
c. $100
d. $120
16.
17.
A retail store credited the Sales account for the sales price and the amount of sales tax on sales. If
the sales tax rate is 5% and the balance in the Sales account amounted to $168,000, what is the
amount of the sales taxes owed to the taxing agency?
a. $160,000.
b. $168,000.
c. $8,400.
d. $8,000.
18.
On December 31, 2005, Bertram Company had an outstanding note payable totaling $125,000.
The note is due in equal annual installments of $25,000 on January 1 of each of the next 5 years.
The current portion of long-term debt that should be reported on the December 31, 2005 balance
sheet is
a. $0
b. $25,000
c. $50,000
d. $125,000
19.
Bonds with a face amount of $1,000,000 and a contractual interest rate of 8% are sold to yield
7.5%. The annual interest expense recorded for the bonds will be
a. $5,000

2
b.
c.
d.
$40,000
$75,000
$80,000.
20.
The contractual rate of interest is usually stated as

a. a monthly rate.
b. a daily rate.
c. a semiannual rate.
d. an annual rate.
21.
If twenty $1,000 convertible bonds with a carrying value of $25,000 are converted into 3,000
shares of $5 par value common stock, the journal entry to record the conversion is
a. Bonds Payable .........................................................................................
25,000
Common Stock .............................................................................
25,000
b.
c.
d.
22.
Bonds Payable .........................................................................................

Premium on Bonds Payable ....................................................................
Common Stock .............................................................................
20,000
5,000
Bonds Payable .........................................................................................

Premium on Bonds Payable ....................................................................
Common Stock .............................................................................
Paid-in Capital in Excess of Par ...................................................
20,000
5,000
Bonds Payable .........................................................................................

Discount on Bonds Payable ..........................................................
Common Stock .............................................................................
Paid-in Capital in Excess of Par ...................................................
25,000
25,000
15,000
10,000
5,000
15,000
5,000
A corporation issued $600,000, 10%, 5-year bonds on January 1, 2003 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, 2003, is
a. $30,000.
b. $24,000.
c. $32,433.
d. $25,947.
ANSWERS
True and False
1. F 2. T 3.F 4. T 5. T 6. T 7. F 8. T 9. F 10. F
Multiple Choice
11. A 12. A 13. B 14. A 15.B 16. A
18. B 19. C 20. D 21. C 22. D
17. C

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ACCOUNTING 202

All liabilities must be paid out of current earnings.

A company should try to keep its current ratio as high as possible.

Notes payable usually require the borrower to pay interest.

Notes payable are often used instead of accounts payable.

Accounts payable are usually interest-bearing.

Most notes are not interest bearing.

MULTIPLE CHOICE QUESTIONS

Most companies pay current liabilities

A current liability is a debt that can reasonably expected to be paid

Use the following information for questions 13-15.

Everett Community College Tutoring Center

Everett Community College Tutoring Center

The contractual rate of interest is usually stated as

Bonds Payable .........................................................................................

Bonds Payable .........................................................................................

Bonds Payable .........................................................................................

Everett Community College Tutoring Center

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