Oklahoma Oil Corp. paid interest of $785,000 during 2013, and the interest payable account decreased by $125,000. What was interest expense for the year?
36. Which of the following is a contingency that should be accrued?
A. The company is being sued and a loss is reasonably possible and reasonably estimable.
B. The company deducts life insurance premiums from employees’ paychecks.
C. The company offers a two-year warranty and the expenses can be reasonably estimated.
D. It is probable that the company will receive $100,000 in settlement of a lawsuit.
37. All else equal, a large increase in unearned revenue in the current period would be expected to produce what effect on revenue in a future period?
A. Large increase, because unearned revenue becomes revenue when revenue is earned.
B. Large decrease, because unearned revenue implies that less revenue has been earned, which reduces future revenue.
C. No effect, because unearned revenue is a liability, so payment will use assets rather than providing revenue.
D. Large decrease, because unearned revenue indicates collection problems that will reduce net revenues in future periods.
38. Kline Company refinanced current debt as long-term debt on January 5, 2014. Kline’s fiscal year ended on December 31, 2013, and its financial statements will be issued sometime in early March 2014. Under IFRS, how would Kline classify the debt on its December 31, 2013, balance sheet?
A. In the “mezzanine” between current and noncurrent liabilities.
B. Kline would not classify the debt as current or noncurrent, but rather would write a disclosure note explaining the circumstances.
C. As a noncurrent liability.
D. As a current liability.
Discount-Mart issued ten thousand $1,000 bonds on January 1, 2013. The bonds have a 10-year term and pay interest semiannually. This is the partial bond amortization schedule for the bonds.
39. What is the stated annual rate of interest on the bonds?
40. What is the effective annual rate of interest on the bonds?
41. When bonds are sold at a premium and the effective interest method is used, at each subsequent interest payment date, the cash paid is:
A. Less than the effective interest.
B. Equal to the effective interest.
C. Greater than the effective interest.
D. More than if the bonds had been sold at a discount.
42. When bonds are retired prior to their maturity date:
A. GAAP has been violated.
B. The issuing company probably will report an ordinary gain or loss.
C. The issuing company probably will report an extraordinary gain or loss.
D. The issuing company will report a non-operating gain or loss.
43. When a company issues bonds between interest dates, the entry to record the issuance of the bonds will:
A. Include a credit to interest payable.
B. Include a debit to interest expense.
C. Include a debit to cash that has been reduced by interest accrued from the last interest date.
D. Include a debit to cash that has been increased by interest that will accrue from sale to the next interest date.
44. A $500,000 bond issue sold for 98. Therefore, the bonds:
A. Sold at a discount because the stated rate of interest was lower than the effective rate.
B. Sold for the $500,000 face amount less $10,000 of accrued interest.
C. Sold at a premium because the stated rate of interest was higher than the yield rate.
D. Sold at a discount because the effective interest rate was lower than the face rate.
45. When bonds include detachable warrants, what is the appropriate accounting for the cash proceeds from the bond issue?
A. The proceeds from the bond issue are allocated between the bonds and the warrants on the basis of their relative market values.
B. The proceeds from the bond issue are allocated between the bonds and the warrants on the basis of their relative face values.
C. A nominal amount is allocated to the warrants.
D. All of the proceeds are allocated to the bonds.
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