Watch Out! Quiz 5 Mistakes to Avoid
Chapters 10 & 11
These are easy mistakes to make. Read each statement, decide what is wrong with it, then click the card to reveal the correction.
1. “Sales tax collected from customers is revenue.” Tap to reveal the mistake
Not revenue.
The company collects the money for the government. Until it is remitted, the amount is a liability.
2. “Employee payroll deductions are an extra payroll expense for the employer.” Tap to reveal the mistake
Employee deductions are withheld from the employee's gross pay.
Employer payroll taxes are an additional employer expense.
3. “Interest expense depends only on the amount borrowed.” Tap to reveal the mistake
Interest depends on principal, annual interest rate, and time.
Principal × Rate × Time
4. “If interest has not been paid yet, there is no interest expense.” Tap to reveal the mistake
Under accrual accounting, interest is recorded when it is incurred, even if it has not yet been paid.
Unpaid interest creates Interest Payable.
5. “A bond's face value changes when it sells at a premium or discount.” Tap to reveal the mistake
Face value does not change.
A premium or discount changes the bond's issue price and carrying value, not the amount that will be repaid at maturity.
6. “A bond sells at a discount when the stated rate is higher than the market rate.” Tap to reveal the mistake
A bond sells at a discount when the stated rate is lower than the market rate.
Investors will pay less because the bond's interest payments are less attractive.
7. “A bond sells at a premium when the stated rate is lower than the market rate.” Tap to reveal the mistake
A bond sells at a premium when the stated rate is higher than the market rate.
Investors will pay more for the higher contractual interest payments.
8. “Cash interest on a bond is calculated using the market interest rate.” Tap to reveal the mistake
Cash interest uses the stated interest rate.
Face Value × Stated Rate determines the contractual cash payment.
9. “Under the effective-interest method, interest expense is based on face value.” Tap to reveal the mistake
Interest expense is based on the beginning carrying value × market interest rate.
10. “A bond discount makes carrying value greater than face value.” Tap to reveal the mistake
A discount makes carrying value less than face value.
Carrying Value = Face Value − Unamortized Discount
11. “A premium bond's carrying value increases as maturity approaches.” Tap to reveal the mistake
A premium bond's carrying value decreases toward face value as the premium is amortized.
12. “To calculate a gain or loss on bond retirement, compare cash paid with face value.” Tap to reveal the mistake
Compare the amount paid with the bond's carrying value on the retirement date.
13. “Treasury stock is an asset because the corporation owns the shares.” Tap to reveal the mistake
Treasury Stock is not an asset.
It is a contra-equity account that reduces total stockholders' equity.
14. “Outstanding shares equal authorized shares minus treasury shares.” Tap to reveal the mistake
Outstanding Shares = Issued Shares − Treasury Shares
Authorized shares do not enter into the calculation.
15. “Par value tells investors what a share is worth in the market.” Tap to reveal the mistake
Par value is not market value.
It is a small legal or stated amount assigned to each share.
16. “A corporation records a gain when it resells treasury stock for more than it paid.” Tap to reveal the mistake
No Income Statement gain is recorded.
Transactions involving a corporation's own stock are equity transactions.
17. “A cash dividend becomes a liability on the payment date.” Tap to reveal the mistake
The liability is created on the declaration date.
The payment date eliminates the liability and reduces Cash.
18. “Dividends are expenses because they reduce retained earnings.” Tap to reveal the mistake
Dividends are not expenses.
They are distributions to owners and reduce retained earnings directly.
19. “A stock dividend reduces total stockholders' equity.” Tap to reveal the mistake
Total stockholders' equity does not decrease.
A stock dividend reallocates amounts within stockholders' equity.
20. “A stock split reduces total stockholders' equity.” Tap to reveal the mistake
No.
A stock split changes the number of shares and the amount associated with each share, but it does not change total stockholders' equity.