1. Dryden Corporation has 100,000 shares of $1 par value common stock and 20,000 shares of 6% cumulative preferred stock, $100 par value, outstanding. The balance in Retained Earnings at the beginning of the year was $1,000,000, and one year’s dividends were in arrears. Net income for the current year was $520,000. If Dryden Corporation paid a dividend of $2 per share on its common stock, what is the balance in Retained Earnings at the end of the year?
a $1,320,000. c $1,200,000. e $1, 800,000
b $1,520,000. d $1,080,000.
2. 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
3. Preferred stock on which the right to receive dividends is forfeited for any year that the dividends are not declared is referred to as:
a. Participating preferred stock
b. Callable preferred stock
c. Cumulative preferred stock
d. Convertible preferred stock
e. Noncumulative preferred stock
4. On January 1, 2011, Merrill Company borrowed $100,000 on a 10 year, 7% installment note payable. The terms of the note require Merrill to pay 10 equal payments of $14,238 each December 31 for 10 years. The required general journal entry to record the first payment on the note on December 31 is 2012 is:
a Notes payable 7,238
Interest expense 7,000
b Notes payable 7000
Interest expense 7,238
c Notes payable 10,000
Interest expense 7,000
d Notes payable 14,238
e Notes payable 10,000
Interest Expense 4,238
5. Stockholder’s equity consists of:
a Long-term assets
b Paid-in capital and retained earnings
c Paid-in capital and par value
d Retained earnings and cash
e Premiums and discounts
6.. The payment pattern for an installment note with equal total payments includes:
a Increasing principal payments
b Decreasing accrued interest
c Constant cash payments
d Both A and B
e All of these
7. Griggs Company holds $50,000 of 8% bonds as a held-to-maturity security. Which of the following is the correct journal entry to record the receipt of the semiannual interest payment:
a debit Cash, $4,000, credit Long-Term Investments---HTM, $4,000
b debit Cash, $2,000, credit Long-Term Investments—HTM, $2,000
c debit Cash, $2,000, credit Interest Revenue, $2,000
d debit Unrealized Gain-Equity, $2,000, credit Cash, $2,000
e debit Cash, $4,000, credit Unrealized Gain-Equity, $4,000
8. 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
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.
9. Promissory notes that require the issuer to make a series of payments consisting of both interest and principal are:
b. Discounted notes
c. Installment notes
e. Investment notes
10. On January 1 year 1, Service Airlines issued $3,500,000 of par value bonds for $3,200,000. The bonds pay interest semiannually on January 1 and July 1. The contract rate of interest is 7% while the market rate of interest for similar bonds is 8%. The bond premium or discount is being amortized at a rate of $10,000 every six months. The company’s December 31, year 1 balance sheet should reflect total liabilities associated with the bond issue in the amount of:
a. $3,220,000 c. $3,097,500 e. $3,902,500
b. $3,342,500 d. $3,780,000
Problem #1 (25 points)
On November 30, 2011, Sterling Transport signed a 5year installment note in the amount of $50,000 in conjunction with the purchase of a motor coach. This note is payable in equal monthly installments of $1,112, which include interest computed at an annual rate of 12%. The first monthly payment is made on December 31, 2001. This note is fully amortizing over 60 months.
a. Prepare the company’s journal entry to record the notes issuance
b. Prepare the journal entries to record the first and second installment payments.
Problem #2 (25 points)
On May 1, year 1, Star Communications issued at par $20 million of 9%, 20-year bonds payable. Interest is payable semiannually each May 1 and November 1.
a What is the amount of cash paid to bondholders for interest during year 1?
b Prepare the adjusting journal entry necessary at December 31, year 1 regarding this
c Interest expense on this bond issue reported in Star’s year 1 income statement is:
d With respect to this bond issue, Star’s balance sheet at December 31, year 1,
includes bonds payable of $