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Exam 10: Accounting for Long-Term Liabilities

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Question 81

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A bond is issued at par value when:

A) The bond pays no interest.
B) The bond is not between interest payment dates.
C) Straight line amortization is used by the company.
D) The market rate of interest is the same as the contract rate of interest.
E) The bond is callable.

F) B) and E)
G) None of the above

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Question 82

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Explain the present value concept as it applies to long term liabilities.

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The basic present value concept is that ...

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Question 83

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Mortgage bonds are backed only by the good faith and credit of the issuing company.

Seedly Corporation's most recent balance sheet reports total assets of $35,000,000 and total liabilities of $17,500,000. Management is considering issuing $5,000,000 of par value bonds (at par) with a maturity date of ten years and a contract rate of 7%. What effect, if any, would issuing the bonds have on the company's debt-to-equity ratio?

A company issued 9.2%, 10-year bonds with a par value of $100,000. Interest is paid semiannually. The annual market interest rate on the issue date was 10%, and the issuer received $95,016 cash for the bonds. The issuer uses the effective interest method for amortization. On the first semiannual interest date, what amount of discount should the issuer amortize?

On July 1, Shady Creek Resort borrowed $250,000 cash by signing a 10-year, 8% installment note requiring equal payments each June 30 of $37,258. What amount of principle will be included in the first annual payment?

A company issues 9% bonds with a par value of $100,000 at par on April 1, which is 4 months after the most recent interest date. The cash received for accrued interest on April 1 by the bond issuer is:

On January 1, a company issues 8%, 5 year, $300,000 bonds that pay interest semiannually each June 30 and December 31. On the issue date, the annual market rate of interest for the bonds is 10%. Compute the price of the bonds on their issue date. The following information is taken from present value tables: $\begin{array}{|l|l|}\hline \text { Present value of an annuity for } 10 \text { periods at } 4 \% & 8.1109 \\\hline \text { Present value of an annuity for } 10 \text { periods at } 5 \% & 7.727 \\\hline \text { Present value of } 1 \text { for } 10 \text { periods at } 4 \% & 0.656 \\\hline \text { Present value of } 1 \text { for } 10 \text { periods at } 5 \% & 0.6139 \\\hline\end{array}$

A corporation borrowed $125,000 cash by signing a 5-year, 9% installment note requiring equal annual payments each December 31 of $32,136. What journal entry would the issuer record for the first payment?

The _________________________ method of amortizing a bond discount allocates an equal portion of the total bond interest expense to each interest period.

A company previously issued $2,000,000, 10% bonds, receiving a $120,000 premium. On the current year's interest date, after the bond interest was paid and after 40% of the total premium had been amortized, the company purchased the entire bond issue on the open market at 98 and retired it. Prepare the journal entry to record the retirement of these bonds.

Compounded means that interest during a second period is based on the total amount borrowed plus the interest accrued in the first period.

Issuers of coupon bonds are not allowed to deduct the interest expense on their tax returns.

On January 1, Year 1 a company borrowed $70,000 cash by signing a 9% installment note that is to be repaid with 4 annual year-end payments of $21,607, the first of which is due on December 31, Year 1. (a) Prepare the company's journal entry to record the note's issuance. (b) Prepare the journal entries to record the first and second installment payments.

The carrying value of bonds at maturity always equals:

The rate of interest that borrowers are willing to pay and lenders are willing to accept for a particular bond and its risk level is the ____________________ of interest.

Describe installment notes and the nature of the typical payment pattern.

Two common ways of retiring bonds before maturity are to (1) exercise a call option or (2) purchase them on the open market.

On January 1 of Year 1, Congo Express Airways issued $3,500,000 of 7% bonds that pay interest semiannually on January 1 and July 1. The bond issue price is $3,197,389 and the market rate of interest for similar bonds is 8%. The bond premium or discount is being amortized at a rate of $10,087 every six months. The amount of interest expense recognized by Congo Express Airways on the bond issue in Year 1 would be:

The legal contract between the issuing corporation and the bondholders is called the bond indenture.