Multiple-Choice Questions

1. Partco hired a secretary for $900 a week. The secretary’s first paycheck had 20% withheld for income taxes, 6.2% for social security, and 1.45% for Medicare taxes. What is Partco’s total expense (including payroll tax expense) related to this payment?

a. $68.85

b. $968.85

c. $651.15

d. $720.00

2. All of the following are current liabilities except

a. Salaries payable.

b. Mortgage payable.

c. Unearned revenue.

d. Accounts payable.

3. The amount a company owes its employees for current work done is

a. Shown on the balance sheet as pension liability.

b. Shown as a current liability.

c. Called postretirement benefits on the balance sheet.

d. Not shown on the balance sheet.

4. Liabilities are often estimated because

a. The related expense needs to be recorded to match the appropriate revenues.

b. It gives managers a way to manage assets.

c. They are usually not disclosed until they are settled.

d. The related assets are already recorded.

5. Advanced Music Technology, Inc., estimated that its warranty costs would be $900 for items sold during the current year, an amount it considers significant. During the year Advanced paid $750 to repair merchandise that was returned by customers. What is the amount of warranty expense for the current year?

a. $750

b. $900

c. $150

d. Cannot be determined

6. On January 1, Sonata Company issued 10-year bonds with a face value of $400,000 and a stated rate of 10%. The cash proceeds from the bond issue amounted to $354,120. Sonata Company will pay interest to the bondholders annually. How much cash will Sonata pay the bondholders on the first payment date?

a. $40,000

b. $48,000

c. $35,412

d. $42,494

7. Refer to the information in multiple-choice question 6. How did the market interest rate compare to the stated rate on the date the bonds were issued?

a. The market rate is higher than the stated rate.

b. The market rate is lower than the stated rate.

c. Both rates are the same.

d. It cannot be determined.

8. Bonds issued with a stated interest rate that is higher than the prevailing market rate are issued at

a. A premium.

b. A discount.

c. Par.

d. It cannot be determined.

9. A $1,000 bond with a stated rate of 8% is issued when the market rate is 10%. How much interest will the bondholders receive each year for the annual interest payments?

a. $100

b. $80

c. $20

d. $800

10. Positive financial leverage means that a company

a. Has more debt than equity.

b. Earns more with borrowed money than the cost of borrowing it.

c. Has the correct amount of debt.

d. Has more equity than debt.