ACCT1A - Financial Accounting Sample Exam 4

Name: __________________________ Date: _____________

1. A company issued 10%, 5-year bonds with a par value of $400,000. The market rate
when the bonds were issued was 8%. The company received $432,458 cash for the
bonds. Using the effective interest method, the amount of interest expense for the
first semiannual interest period is:
A) $21,622.90.
B) $20,000.00.
C) $ 4,324.58.
D) $17,298.32
E) $16,000.00

2. A company has 3,000 shares of $2 par value common stock and 1,500 shares of 8%,
$150 par, non-cumulative preferred stock outstanding. The balance in Retained
Earnings at the beginning of the year was $400,000. The Net Loss for the current
year was $30,000. If the company paid a dividend of $1 per share on its common
stock, what is the balance in Retained Earnings at the end of the year?
A) $349,000
B) $365,800
C) $451,000
D) $400,000
E) $409,000

3. The contract between the bond issuer and the bondholders, which identifies the
rights and obligations of the parties, is called a(n):
A) Debenture.
B) Bond indenture.
C) Mortgage.
D) Installment note.
E) Mortgage contract.

4. A corporation issued 300 shares of its $5 par value common stock in payment of a
$1,800 charge from its accountant for assistance in filing its charter with the state .
The entry to record this transaction will include:
A) A $1,800 credit to Common Stock.
B) A $1,500 debit to Organization Expenses.
C) A $300 credit to Contributed Capital in Excess of Par Value, Common Stock.
D) A $1,800 debit to Legal Expenses.
E) A $1,800 credit to Cash.

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5. A company issued 7-year, 8% bonds with a par value of $200,000. The market rate
when the bonds were issued was 5.5%. The company received $203,010 cash for the
bonds. Using the straight-line method, the amount of recorded interest expense for
the first semiannual interest period is:
A) $8,000
B) $8,215
C) $7,785
D) $16,000
E) $4,990

6. A company retires its bonds at 105. The carrying value of the bonds at the
retirement date is $103,745. The issuer's journal entry to record the retirement will
include a:
A) Debit to Premium on Bonds.
B) Credit to Premium on Bonds.
C) Debit to Discount on Bonds.
D) Credit to Gain on Bond Retirement.
E) Credit to Bonds Payable.

7. Buying stock in a corporation is attractive to investors because:

A) Stockholders are not liable for the corporation's actions and debts.
B) Stock is easily transferred.
C) A corporation has unlimited life.
D) Shareholders are not agents of the corporation.
E) All of the above.

8. A company has bonds outstanding with a par value of $100,000. The unamortized
premium on these bonds is $2,700. If the company retired these bonds at a call price
of 99, the gain or loss on this retirement is:
A) $ 1,000 gain.
B) $ 1,000 loss.
C) $ 2,700 loss.
D) $ 2,700 gain.
E) $ 3,700 gain.

9. Book value per share is often used as a starting point for:

A) Stock valuation.
B) Merger negotiations.
C) Price setting for public utilities.
D) Loan contracts.
E) All of the above.

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10. A company has 500 shares of $50 par value preferred stock outstanding, and the call
price of its preferred stock is $60 per share. It also has 20,000 shares of common
stock outstanding, and the total value of its stockholders' equity is $680,000. The
company's book value per common share equals:
A) $31.71.
B) $32.50.
C) $32.75.
D) $33.17.
E) $60.00.

11. Par value of a stock refers to the:

A) Issue price of the stock.
B) Value assigned to a share of stock by the corporate charter.
C) Market value of the stock on the date of the financial statements.
D) Maximum selling price of the stock.
E) Dividend value of the stock.

12. A company must repay the bank $10,000 cash in 3 years for a loan it entered into.
The loan is at 8% interest compounded annually. The present value factor for 3
years at 8% is 0.7938. The present value of the loan is:
A) $10,000.
B) $12,400.
C) $ 7,938.
D) $ 9,200.
E) $ 7,600.

13. The right of common shareholders to protect their proportionate interest in a

corporation by having the first opportunity to buy additional proportionate shares of
common stock issued by the corporation is called a:
A) Preemptive right.
B) Proxy right.
C) Right to call.
D) Financial leverage.
E) Voting right.

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14. The Discount on Common Stock account reflects:

A) The difference between the par value of stock and its issue price when it is
issued at a price below par value.
B) One share's portion of the issued corporation's net assets recorded in its
accounts.
C) The difference between the par value of the stock and the amount contributed by
stockholders when the amount contributed is more than par value.
D) An amount of assets defined by state law that stockholders must invest and leave
invested in a corporation.
E) The amount a corporation must pay in addition to dividends in arrears if and
when it exercises its right to retire a share of callable preferred stock.

15. A company received cash proceeds of $206,948 on a bond issue with a par value of
$200,000. The difference between par value and issue price for this bond is recorded
as a:
A) Credit to Interest Income.
B) Credit to Premium on Bonds Payable.
C) Credit to Discount on Bonds Payable.
D) Debit to Premium on Bonds Payable.
E) Debit to Discount on Bonds Payable.

16. Mark and Holly Melton, the owners of Melton Franchise Systems, say the key to
their success is planning the financing for each individual franchise owner. Using
the debt to equity ratio, which of the following would the Melton's assess as having
the riskiest financing structure?

A) Franchise A
B) Franchise B
C) Franchise C
D) Franchise D
E) Franchise E

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17. A proxy is:

A) A legal document that gives a designated agent of a stockholder the power to
vote the stock.
B) A contractual commitment by an investor to purchase unissued shares of stock.
C) An amount of assets defined by state law that stockholders must invest and leave
invested in a corporation.
D) The right of common stockholders to protect their proportionate interests in a
corporation by having the first opportunity to purchase additional shares of
common stock issued by the corporation.
E) An arbitrary amount assigned to no-par stock by the corporation's board of
directors.

18. A company issued 60 shares of $100 par value stock for $7,000 cash. The total
amount of contributed capital is:
A) $ 100.
B) $ 600.
C) $1,000.
D) $6,000.
E) $7,000.

19. Treasury stock is classified as:

A) An asset account.
B) A contra asset account.
C) A revenue account.
D) A contra equity account.
E) A liability account.

20. A premium on common stock:

A) Is the amount paid in excess of par by purchasers of newly issued stock.
B) Is the difference between par value and issue price when the amount paid is
below par.
C) Represents profit from issuing stock.
D) Represents capital gain on sale of stock.
E) Is prohibited in most states.

21. Preferred stock that the issuing corporation at its option may retire by paying a
specified amount to the preferred stockholders plus any dividends in arrears is called:
A) Convertible preferred stock.
B) Callable preferred stock.
C) Premium stock.
D) Cumulative preferred stock.
E) Participating preferred stock.

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22. Which of the following statements is true?

A) Interest on bonds is tax deductible.
B) Interest on bonds is not tax deductible.
C) Dividends to stockholders are tax deductible.
D) Bonds do not have to be repaid.
E) Bonds always decrease return on equity.

23. A corporation borrowed $125,000 cash by signing a 5-year, 9% installment note

requiring annual payments each December 31 of accrued interest plus equal amounts
of principal. What journal entry would the issuer record for the first payment?

A) Item A
B) Item B
C) Item C
D) Item D
E) Item E

24. The Discount on Bonds Payable account is:

A) A liability.
B) A contra liability.
C) An expense.
D) A contra expense.
E) A contra equity.

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25. The contract rate of interest is also called the:

A) Coupon rate.
B) Stated rate.
C) Nominal rate.
D) Market rate.
E) Each of A, B, and C.

26. Bonds that have interest coupons attached to their certificates, which the bondholders
detach during each interest period and present to a bank for collection, are called:
A) Coupon bonds.
B) Callable bonds.
C) Serial bonds.
D) Convertible bonds.
E) Registered bonds.

27. Stockholders' equity consists of:

A) Long-term assets.
B) Contributed capital and retained earnings.
C) Contributed capital and par value.
D) Retained earnings and cash.
E) Premiums and discounts.

28. A bond traded at 102 ½ means that:

A) The bond pays 2.5% interest.
B) The bond traded at $1,025 per $1,000 bond.
C) The market rate of interest is 2.5%.
D) The bonds were retired at $1,025 each.
E) The market rate of interest is 2 ½ % above the contract rate.

29. Promissory notes that require the issuer to make a series of payments consisting of
both interest and principal are:
A) Debentures.
B) Discounted notes.
C) Installment notes.
D) Indentures.
E) Investment notes.

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30. A company issued 7%, 5-year bonds with a par value of $100,000. The market rate
when the bonds were issued was 7.5%. The company received $97,947 cash for the
bonds. Using the effective interest method, the amount of interest expense for the
first semiannual interest period is:
A) $3,500.00.
B) $3,673.01.
C) $3,705.30.
D) $7,000.00.
E) $7,346.03.

31. A company issued 5-year, 7% bonds with a par value of $100,000. The market rate
when the bonds were issued was 6.5%. The company received $101,137 cash for the
bonds. Using the effective interest method, the amount of recorded interest expense
for the first semiannual interest period is:
A) $3,500.00.
B) $7,000.00
C) $3,286.95.
D) $6,573.90
E) $1,750.00

32. Adidas issued 10-year, 8% bonds with a par value of $200,000. Interest is paid
semiannually. The market rate on the issue date was 7.5%. Adidas received $206,948
in cash proceeds. Which of the following statements is true?
A) Adidas must pay $200,000 at maturity and no interest payments.
B) Adidas must pay $206,948 at maturity and no interest payments.
C) Adidas must pay $200,000 at maturity plus 20 interest payments of $8,000 each.
D) Adidas must pay $206,948 at maturity plus 20 interest payments of $8,000 each.
E) Adidas must pay $200,000 at maturity plus 20 interest payments of $7,500 each.

33. Amortizing a bond discount:

A) Allocates a part of the total discount to each interest period.
B) Increases the market value of the Bonds Payable.
C) Decreases the Bonds Payable account.
D) Decreases interest expense each period.
E) Increases cash flows from the bond.

34. A company issues 9%, 20-year bonds with a par value of $750,000. The current
market rate is 9%. The amount of interest owed to the bondholders for each
semiannual interest payment is.
A) $ 0.
B) $ 33,750.
C) $ 67,500.
D) $ 750,000.
E) $1,550,000.

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35. A company has net income of $850,000. It also has 125,000 weighted-average
common shares outstanding and a market value per share of $115. The company's
price–earnings ratio equals:
A) 16.9.
B) 14.7.
C) 92.0.
D) 13.5.
E) 8.0.

36. Shamrock Company had net income of $30,000. On January 1, the number of shares
of common stock outstanding were 8,000. On April 1, the company issued an
additional 2,000 shares of common stock. The company declared a $2,700 dividend
on its noncumulative, nonparticipating preferred stock. There were no other stock
transactions. The company's earnings per share is:
A) $2.87.
B) $2.73.
C) $3.41.
D) $3.16.
E) $3.75.

37. Dividend yield is the percent of cash dividends paid to common shareholders relative
to the:
A) Common stock's market value.
B) Earnings per share.
C) Investors' purchase price of the stock.
D) Amount of retained earnings.
E) Amount of cash.

38. The total amount of stock that a corporation's charter allows it to issue is referred to
as:
A) Issued stock.
B) Outstanding stock.
C) Common stock.
D) Preferred stock.
E) Authorized Stock.

39. A bond sells at a discount when the:

A) Contract rate is above the market rate.
B) Contract rate is equal to the market rate.
C) Contract rate is below the market rate.
D) Bond has a short-term life.
E) Bond pays interest only once a year.

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40. Bonds that mature at different dates with the result that the entire principal amount is
repaid gradually over a number of periods are known as:
A) Registered bonds.
B) Bearer bonds.
C) Callable bonds.
D) Sinking fund bonds.
E) Serial bonds.

41. The market value of a bond is equal to:

A) The present value of all future cash payments provided by a bond.
B) The present value of all future interest payments provided by a bond.
C) The present value of the principal for an interest-bearing bond.
D) The future value of all future cash payments provided by a bond.
E) The future value of all future interest payments provided by a bond.

42. If an issuer sells a bond at a date other than an interest payment date:
A) This means the bond sells at a premium.
B) This means the bond sells at a discount.
C) The issuing company will report a loss on the sale of the bond.
D) The issuing company will report a gain on the sale of the bond.
E) The buyers normally pay the issuer the purchase price plus any interest accrued
since the prior interest payment date.

43. Prior period adjustments are reported in the:

A) Income statement.
B) Balance sheet.
C) Statement of retained earnings.
D) Statement of cash flows.
E) Notes to the financial statements.

44. The amount of income earned per share of a company's common stock is known as:
A) Restricted retained earnings per share.
B) Earnings per share.
C) Continuing operations per share.
D) Dividends per share.
E) Book value per share.

45. The payment pattern for an installment note that promises accrued interest plus equal
amounts of principal includes:
A) Decreasing total payments.
B) Decreasing accrued interest.
C) Constant principal payments.
D) Both A and B.
E) All of the above.

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46. A discount on bonds payable:

A) Occurs when a company issues bonds with a contract rate less than the market
rate.
B) Occurs when a company issues bonds with a contract rate more than the market
rate.
C) Increases the Bond Payable account.
D) Decreases the total bond interest expense.
E) Is not allowed in many states to protect creditors.

47. Bonds with a par value of less than $1,000 are known as:
A) Junk bonds.
B) Baby bonds.
C) Callable bonds.
D) Unsecured bonds.
E) Convertible bonds.

48. Prior to June 1, a company has never had any treasury stock transactions. A
company repurchased 100 shares of its common stock on June 1 for $5,000. On July
1, it reissued 50 of these shares at $52 per share. On August 1, it reissued the
remaining treasury shares at $49 per share. What is the balance in the Contributed
Capital, Treasury Stock account on August 2?
A) $5,050.
B) $2,600.
C) $100.
D) $50.
E) $0.

49. A corporation sold 14,000 shares of its $10 par value common stock at a cash price
of $13 per share. The entry to record this transaction would include:
A) A debit to Contributed Capital in Excess of Par Value, Common Stock for
$42,000.
B) A debit to Cash for $140,000.
C) A credit to Common Stock for $182,000.
D) A credit to Common Stock for $140,000.
E) A credit to Contributed Capital in Excess of Par Value, Common Stock for
$182,000.

50. A company purchased equipment and signed a 7-year installment loan at 9% annual
interest. The annual payments equal $9,000. The present value of an annuity for 7
years at 9% is 5.0330. The present value of the loan is:
A) $ 9,000.
B) $ 5,033.
C) $63,000.
D) $57,330.
E) $45,297.

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Answer Key
1. D
2. A
3. B
4. C
5. C
6. A
7. E
8. E
9. E
10. B
11. B
12. C
13. A
14. A
15. B
16. B
17. A
18. E
19. D
20. A
21. B
22. A
23. C
24. B
25. E
26. A
27. B
28. B
29. C
30. B
31. C
32. C
33. A
34. B
35. A
36. A
37. A
38. E
39. C
40. E
41. A
42. E
43. C
44. B
45. E
46. A
47. B
48. D

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49. D
50. E

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