1. Your company issued bonds at a premium. Which of the following statements is NOT true? A. The...

Question:

1. Your company issued bonds at a premium. Which of the following statements is NOT true?

A. The contra account, premium on bonds payable, is amortized each year by shifting part of its balance to interest expense.

B. On the date of issuance, the stated interest rate was greater than the market interest rate.

C. As the current date approaches the maturity date, the carrying value of the bond approaches the face value of the bond.

D. The account used to record the premium has a normal debit balance.

2. Which of the following would help a company improve its quick ratio without necessarily lowering the liability risk to a creditor?

A. Borrowing money on a long-term note just before the end of the accounting period.

B. Shifting resources from long-term assets to short-term assets such as supplies and inventory.

C. Shifting obligations from long-term liabilities to short-term liabilities.

D. Acquiring inventory by issuing a long-term note.

Long-Term Debt

Long-term debt is a liability, obligation or commitment by the company to the lenders and creditors in exchange for receiving cash for business purposes such as business expansion but always comes with a cost which is the interest payment. In accounting terms, long-term debt has a maturity date of more than one year.

Answer and Explanation:

1. The correct choice is D. The account used to record the premium has a normal debit balance.

The premium on bonds payable is an additional payment made when investing in bonds. Therefore, it has a normal credit balance.

2. The correct choice is D. Acquiring inventory by issuing a long-term note.

Inventory is a part of the current assets and acquiring a current asset will increase the current ratio and it is more sufficient to cover the short-term obligations.


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Long-Term Debt: Definition, Cost & Formula

from Financial Accounting: Help and Review

Chapter 8 / Lesson 7
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