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Quiz- financial liabilities

Multiple Choice
Identify the choice that best completes the statement or answers the question.

1. On February 1, 2013, Lantern Corp. issued 12 percent, 2,000,000 face value, ten-year bonds
for 2,234,000 plus accrued interest. The bonds are dated November 1, 2012, and interest is
payable on May 1 and November 1. Lantern reacquired all of these bonds at 102 on May 1,
2016, and retired them. Unamortized bond premium on that date was 156,000. Ignoring the
income tax effect, what was Lantern's gain on the bond retirement?
a. 116,000
b. 194,000
c. 234,000
d. 236,000

2. On October 1, 2016, Westridge Inc. issued, at 101 plus accrued interest, 800 of its 10 percent,
1,000 bonds. The bonds are dated July 1, 2016, and mature on July 1, 2012. Interest is payable
semiannually on January 1 and July 1. At the time of issuance, Westridge would receive cash of
a. 800,000.
b. 808,000.
c. 820,000.
d. 828,000.

3. On July 1, 2016, Riviera Manufacturing Co. issued a five-year note payable with a face amount
of 250,000 and an interest rate of 10 percent. The terms of the note require Riviera to make five
annual payments of 50,000 plus accrued interest, with the first payment due June 30, 2017.
With respect to the note, the current liabilities section of Riviera's December 31, 2016, balance
sheet should include
a. 12,500.
b. 50,000.
c. 62,500.
d. 75,000.

4. Dean, Inc. has 2,000,000 of notes payable due June 15, 2017. At the financial statement date
of December 31, 2016, Dean signed an agreement to borrow up to 2,000,000 to refinance the
notes payable on a long-term basis. The financing agreement called for borrowings not to
exceed 80 percent of the value of the collateral Dean was providing. At the date of issue of the
December 31, 2016, financial statements, the value of the collateral was 2,400,000 and was not
expected to fall below this amount during 2017. In its December 31, 2016, balance sheet, Dean
should classify notes payable as

Short-Term Long-Term
Obligations Obligations

a.  2,000,000 0
b.  400,000 1,600,000
c.  80,000 1,920,000
d.  0 2,000,000

5. Huhubels Company had an overdue 7% note payable to Power Bank at 1,300,000 and accrued
interest of 91,000.

As a result of restructuring agreement on January 1, 2019, Power Bank agreed to the following
provisions:
The principal obligation is reduced to 1,000,000.
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The accrued interest of 91,000 is forgiven.

The date of maturity is extended to December 31, 2021.
Annual interest of 6% is to be paid for 3 years every December 31.

The present value of 1 at 7% for 3 periods is 0.816 and the present value of an ordinary annuity
of 1 at 7% for 3 periods is 2.62.

What is the interest expense to be recognized for 2020?

a. 68,124
b. 58,380
c. 60,000
d. 70,000

6. Direct costs incurred to sell shares such as underwriting costs should be accounted for as
1. a reduction of share premium.
2. an expense of the period in which the shares are issued.
3. an intangible asset.
a. 1
b. 2
c. 3
d. 1 or 3

7. Martin Company signed a 5,000, 3-month, 6% note payable, on December 1, 2018, with the
principle plus interest due on March 1, 2019. If the accounting period ends on December 31,
which of the following statements is TRUE?
a. On December 31, 2018, Martin will debit Interest Expense for 50
b. On December 31, 2018, Martin will credit Interest Payable for 75
c. On March 1, 2019, Martin will debit Interest Expense for 75
d. On March 1, 2019, Martin will debit Interest Payable for 25

8. Natsu Company is authorized to issue 4,500,000 of 8%, 10-year bonds dated July 1, 2020 with
interest payments on June 30 and December 31.

When the bonds are issued on November 1, 2020, the entity received cash of 5,000,000
including accrued interest.

What is the discount or premium on bonds payable?

a. 380,000 bond premium.
b. 380,000 bond discount
c. 120,000 bond premium
d. 120,000 bond discount

9. On December 31, 2018, the liability section of Texas Company’s statement of financial position
included bonds payable of 10 million and unamortized premium on bonds payable of 180,000.
Further verification revealed that these bonds were issued on Dec. 31, 2016 and will become
due on Dec. 31, 2026. Interest at 12% is payable every June 30 and December 31.
On April 1, 2019, Texas retired 4,000,000 of these bonds at 97 plus accrued interest.
How much was the total amount of cash paid for the retirement of bonds on April 1, 2019?
a. 3,950,000
b. 4,000,000
c. 4,040,000
d. 4,180,000
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10. On June 30, 2019, Helga Company issued at 99, 5,000 bonds of 8%, 1,000 face amount. The
bonds were issued through an underwriter to whom the entity paid bond issue cost of 425,000.

On June 30, 2019, what amount should be reported as bond liability?

a. 4,950,000
b. 4,525,000
c. 4,575,000
d. 5,000,000

11. Lyle, Inc. is preparing its financial statements for the year ended December 31, year 2.
Accounts payable amounted to 360,000 before any necessary year-end adjustment related to
the following:

 At December 31, year 2, Lyle has a 50,000 debit balance in its accounts payable to
Ross, a supplier, resulting from a 50,000 advance payment for goods to be
manufactured to Lyle’s specifications.
 Checks in the amount of 100,000 were written to vendors and recorded on December
29, year 2. The checks were mailed on January 5, year 3.

What amount should Lyle report as accounts payable in its December 31, year 2 balance
sheet?
a. 510,000
b. 410,000
c. 310,000
d. 210,000

12. When the interest payment dates of a bond are May 1 and November 1, and a bond issue is
sold on June 1, the amount of cash received by the issuer will be
a. decreased by accrued interest from June 1 to November 1.
b. decreased by accrued interest from May 1 to June 1.
c. increased by accrued interest from June 1 to November 1.
d. increased by accrued interest from May 1 to June 1.

13. Bruno Company after having experienced financial difficulties in 2023, negotiated with a major
creditor and arrived at an agreement to restructure a note payable on December 31, 2023. The
creditor was owed 3,600,000 and interest of 400,000 but agreed to accept equipment worth
700,000 and note receivable from Bruno Company’s customer with carrying amount of
2,700,000. The equipment had an original cost of 900,000 and accumulated depreciation of
300,000what amount should be recognized as gain from debt extinguishment on December 31,
2023?
a. 700 000 c. 400,000
b. 500,000 d. 0

14. Aztral Company had P 3,000,000 note payable due on May 31, 2020. Under the existing loan
facility, the entity had the discretion to refinance or roll over the note payable for at least twelve
months after the end of reporting period.

On December 31, 2019, what amount of the note payable should be reported as noncurrent
liability?
a. 250,000
b. 1,500,000
c. 2,000,000
d. 3,000,000
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15. Reich, Inc. issued bonds with a maturity amount of 200,000 and a maturity ten years from date
of issue. If the bonds were issued at a premium, this indicates that
a. the effective yield or market rate of interest exceeded the stated (nominal) rate.
b. the nominal rate of interest exceeded the market rate.
c. the market and nominal rates coincided.
d. no necessary relationship exists between the two rates.

16. Carr Corporation retires its 100,000 face value bonds at 105 on January 1, following the
payment of interest. The carrying value of the bonds at the redemption date is 103,745. The
entry to record the redemption will include a
a. credit of 3,745 to Loss on Bond Redemption.
b. debit of 3,745 to Premium on Bonds Payable.
c. credit of 1,255 to Gain on Bond Redemption.
d. debit of 5,000 to Premium on Bonds Payable.

17. On August 1, 2019, Golden Bake Company borrowed 2,000,000 on a 8% note payable. The
entity paid the first of four quarterly payments of 400,00 when due on December 30,2019.

On December 31, 2019, what amount should be reported as note payable?

a. 1,760,000
b. 1,840,000
c. 1,600,000
d. 1,500,000

18. Spare Company had outstanding share capital with par value 50,000,000 and a 12%
convertible bond payable in the face amount of 10,000,000 interest payment dates of the bond
issue are June 30 and December 31.

The Conversion clause in the bond indenture entitled the bondholders to receive 40 shares of
20 par value in exchange for each 1,000 bond.

On June 30, 2020, the holders of 5,000,000 face value bonds exercised the conversion
privilege. The market price of the bonds on that date was 1,100 per bond in the market price of
the share was 30.

The total unamortized bond discount at the date of conversion was 500,000. The share
premium from conversion privilege has a balance of 2,000,000 on June 30, 2020.

What amount of share premium should be recognize by reason of the conversion of bonds
payable into share capital?
a. 2,000,000
b. 2,750,000
c. 3,000,000
d. 1,750,000

19. On December 1, 2019, the Western Company issued at 103, one hundred of its 5%, 1000
bonds. Attached to each bond was one detachable stock purchase warrant entitling the holder
to purchase 10 shares of Western’s common stock. On December 1, 2019, the market value of
the bonds, without the stock purchase warrant was 94, and the market value of each stock
purchase warrant was 60. The amount of the proceeds from the issuance that should be
accounted for as initial carrying value of the bonds payable would be.
a. 940000 c. 97,000
b. 96,820. d. 103,000
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20. On January 1, year 2, London Corporation borrowed 500,000 on a 8%, noninterest-bearing

note due in four years. The present value of the note on January 1, year 2, was 367,500.
London Corporation elects the fair value method for reporting its financial liabilities. On
December 31, year 2, it is determined the fair value of the note is 408,150. At what amount
should the discount on notes payable be presented on the balance sheet on December 31, year
2?
a. 132,500
b. 103,100
c. 91,850
d. 0

21. The following information relates to John Paul Company’s obligations as of December 31, 2021.
Determine the amount if any, that should be reported as current liability in John Paul’s
December 31, 2021 balance sheet.

Accounts payable per general ledger control amounted to 5,440,000, net of 240,000 debit
balances in suppliers’ accounts. The unpaid voucher file included the following items that
not had been recorded as of December 31, 2021:

a) A Company – 224,000 merchandise shipped on December 31, 2021, FOB destination;

received on January 10, 2022.
b) B, Inc. – 192,000 merchandise shipped on December 26, 2021, FOB shipping point;
received on January 16, 2022.
c) C Super Services – 144,000 janitorial services for the three-month period ending
January 31, 2022.
d) MERALCO – 67,200 electric bill covering the period December 16, 2021 to January 15,
2022.

On December 28, 2021, a supplier authorized John Paul to return goods billed at 160,000
and shipped on December 20, 2021. The goods were returned by John Paul on December
28, 2021, but the 160,000 credit memo was not received until January 6, 2022.

a. 5,923,200 b. 5,712,000 c. 5,601,600 d. 5,841,600

22. On March 1, year 1, Fine Co. borrowed 10,000 and signed a two-year note bearing interest at
12% per annum compounded annually. Interest is payable in full at maturity on February 28,
year 3. What amount should Fine report as a liability for accrued interest at December 31, year
2?
a. 0
b. 1,000
c. 1,200
d. 2,320

23. At the year end, Sunshine Company showed the following data with respect to matured
obligation:

Note payable 5,000,000

Accrued interest 500,000

The entity is threatened with a court suit if it could not pay a maturing debt. Accordingly, the
entity entered into an agreement with the creditor for the issuance of share capital in full
settlement of the note payable.

The agreement provided for the issue of 35,000 shares with par value of 100. The share is
currently quoted at 130.

The fair value of the note payable on the date of restructuring is 4,700,000.
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1. What amount should be recognized as gain from extinguishment of debt?

a. 1,000,000
b. 2,000,000
c. 950,000
d. 800,000

2. If the shares do not have fair value, what amount should be recognized as gain from
extinguishment of debt?
a. 200,000
b. 800,000
c. 300,000
d. 0

3. If both shares and note payable do not have fair value, what amount should be
recognized as gain from extinguishment of debt?
a. 2,000,000
b. 1,500,000
c. 1,000,000
d. 0

24. On July 1, 2019, Justine Company borrowed 1,000,000 on a 10% five-year payable.
On December 31, 2019, the fair value of the note is determined to be 975,000 based on market
and interest factors.

The entity has elected the fair value option for reporting the financial liability.

1. What amount should be reported as interest expense for 2019?

a. 100,000
b. 97,500
c. 50,000
d. 48,750

2. What is the carrying amount of the note payable on December 31,2019?

a. 1,000,000
b. 975,000
c. 500,000
d. 900,000

3. What is the gain or loss to be recognized in 2019 as a result of the fair value option?
a. 25,000 gain
b. 25,000 loss
c. 12,500 gain
d. 0

25. Among the short-term obligations of Lance Company as of December 31, the statement of
financial position date, are notes payable totaling 250,000 with the Madison National
Bank. These are 90-day notes, renewable for another 90-day period. These notes
should be classified on the statement of financial position of Lance Company as
a. current liabilities.
b. deferred charges.
c. non-current liabilities.
d. intermediate debt.

26. Where is debt callable by the creditor reported on the debtor's financial statements?
a. Non-current liability.
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b. Current liability if the creditor intends to call the debt within the year, otherwise a non-
current liability.
c. Current liability if it is probable that creditor will call the debt within the year, otherwise
a non-current liability.
d. Current liability.

27. Identify if the statements are true or false:

I. A zero-interest-bearing note payable that is issued at a discount will not result in any
interest expense being recognized.
II. Dividends in arrears on cumulative preferred stock should be recorded as a current
liability.
a. Both statements are true.
b. Statement I is true while statement II is false.
c. Both statements are false.
d. Statement I is false while statement II is true.

28. Which of the following is true about accounts payable?

a. Accounts payable should not be reported at their present value.
b. When accounts payable are recorded at the net amount, a Purchase Discounts account will
be used.
c. When accounts payable are recorded at the gross amount, a Purchase Discounts Lost
account will be used.
d. none of the above.

29. Trade and other payables consist of the following, except:

a. Accounts Payable                   
b. Notes Payable                
c. Bank Overdraft                 
d. Short term Debt

30. The amortized cost of bonds payable means

a. Face amount plus premium on bonds payable
b. Face amount minus discount on bonds payable
c. Face amount minus bond issue cost
d. Face amount plus premium on bonds payable, minus discount on bonds payable and
minus bond issue cost.

31. Convertible bonds

a. Have priority over the indebtedness
b. Are usually secured by a mortgage
c. Pay interest only in the event net income is sufficient to cover the interest
d. May be exchange for equity securities.

32. A transaction whereby a debtor and creditor may renegotiate the terms of a financial liability
with the result that the liability is fully or partially extinguished by the debtor issuing equity
instruments to the creditor.
a. Asset swap
b. Equity swap.
c. Liability swap
d. Modification of terms

33. Bonds payable not designated at fair value through profit or loss shall be measured initially at
a. Fair value
b. Fair value plus bonds issue cost
c. Fair value minus bonds issue cost.
d. Face amount
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34. Bonds that are retired prior to the maturity date with proceeds from a new bond issue. The gain
or loss from the early extinguishment of debt should be
a. Amortized over the life of the new bond issued
b. Recognized in income from continuing operations
c. Amortized over the remaining original life of the retired bond issued
d. Recognized in retained earnings

35. If bonds are issued initially at a premium and the effective-interest method of amortization is
used, interest expense in the earlier years will be
a. Greater than if the straight-line method were used.
b. Greater than the amount of the interest payments.
c. The same as if the straight-line method were used.
d. Less than if the straight-line method were used.

36. Statements:
i. The bondholder is usually required to purchase the interest that has accrued from
the most previous interest date to the date of sale.
ii.Bond issue costs are expensed as incurred.
a. Both statements are true.
b. First statement is true, second statement is false.
c. First statement is false, second statement is true.
d. Both statements are false.

37. Statement I- There is no gain or loss on conversion at maturity

Statement II- Carrying amount of bonds is equal to the face amount plus accrued interest if
paid, plus unamortized premium or minus unamortized discount and bond issue cost

a. Both statements true

b. 1st statement true; 2nd statement false
c. 1st statement false; 2nd statement true
d. Both statement false

38. If bonds are initially sold at a discount and the straight-line method of amortization is used,
interest expense in the earlier years will
a. exceed what it would have been had the effective-interest method of amortization been
used.
b. be less than what it would have been had the effective-interest method of amortization been
used.
c. be the same as what it would have been had the effective-interest method of amortization
been used.
d. be less than the stated (nominal) rate of interest.

39. Bonds are a popular source of financing because

a. Company having cash flow problems can postpone payment of interest to bondholders
b. Financial analysts tend to downgrade a company that has raised large amounts of cash by
frequent issues of stock
c. Bond interest expense is deductible for tax purposes, while dividends paid on stock are not
d. The bondholders can always convert their bonds into stock if they choose

40. When bonds are issued with share warrants, the equity component is equal to
a. Zero
b. The excess of the proceeds over the fair value of the bonds without the share warrants.
c. The market value of the share warrants.
d. The excess of the proceeds over the face amount of the bonds.