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Exam 14: Long-Term Liabilities

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Question 51

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On January 1 of Year 1, Drum Line Airways 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 amount of interest expense recognized by Drum Line Airways on the bond issue in Year 1 would be:

A) $132,500.
B) $225,000.
C) $265,000.
D) $245,000.
E) $280,000.

F) A) and D)
G) B) and E)

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Question 52

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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.

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Question 53

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

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.

A company issued 5-year, 7% bonds with a par value of $100,000. The market rate when the bonds were issued was 6.5%. The company received $101,137 cash for the bonds. Using the straight-line method, the amount of recorded interest expense for the first semiannual interest period is:

A pension plan is a contractual agreement between an employer and its employees in which the employer provides benefits to employees after they retire.

Callable bonds have an option exercisable by the issuer to retire them at a stated dollar amount prior to maturity.

Bonds issued in the names and addresses of their holders are ____________________ bonds.

_____________________ bonds can be exchanged for a fixed number of shares of the issuing corporation's common stock.

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

On October 1 of the current year a corporation sold, at par plus accrued interest, $1,000,000 of its 12% bonds, which were dated July 1 of this year. What amount of bond interest expense should the company report on its current year income statement?

The use of debt financing insures an increase in return on equity.

Which of the following accurately describes a debenture?

An advantage of bond financing is that issuing bonds does not affect owner control.

A bondholder that owns a $1,000, 10%, 10-year bond has:

A company issued 10-year, 9% bonds, with a par value of $500,000 when the market rate was 9.5%. The issuer received $484,087 in cash proceeds. Prepare the issuer's journal entry to record the bond issuance.

An annuity is a series of equal payments at equal time intervals.

On January 1, a company issues bonds dated January 1 with a par value of $400,000. The bonds mature in 5 years. The contract rate is 7%, and interest is paid semiannually on June 30 and December 31. The market rate is 8% and the bonds are sold for $383,793. The journal entry to record the issuance of the bond is:

Martin Corporation issued $3,000,000 of 8%, 20-year bonds payable at par value on January 1. Interest is payable each June 30 and December 31. (a) Prepare the general journal entry to record the issuance of the bonds on January 1. (b) Prepare the general journal entry to record the first interest payment on June 30.

On January 1, a company issued a $500,000, 10%, 8-year bond payable, and received proceeds of $487,000. Interest is payable each June 30 and December 31. The company uses the straight-line method to amortize the discount. The amount of discount amortized each period is $812.50. ($500,000 - $487,000)/16 = $812.50