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Exam 10: Reporting and Analyzing Long-Term Liabilities

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Question 91

Multiple Choice

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A disadvantage of bond financing is:

A) Bonds do not affect owners' control.
B) Interest on bonds is tax deductible.
C) Bonds can increase return on equity.
D) It allows firms to trade on the equity.
E) Bonds pay periodic interest and the repayment of par value at maturity.

F) A) and B)
G) C) and E)

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Question 92

Multiple Choice

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A company may retire bonds by all but which of the following means?

A) Exercising a call option.
B) The holders converting them to stock.
C) Purchasing the bonds on the open market.
D) Paying them off at maturity.
E) Paying all future interest and cancelling the debt.

F) All of the above
G) D) and E)

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Question 93

Multiple Choice

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On January 1,$300,000 of par value bonds with a carrying value of $310,000 is converted to 50,000 shares of $5 par value common stock.The entry to record the conversion of the bonds includes all of the following entries except:

Explain the amortization of a bond discount.Identify and describe the amortization methods available.

Chang Industries has bonds outstanding with a par value of $200,000 and a carrying value of $203,000.If the company calls these bonds at a price of $201,000,the gain or loss on retirement is:

On January 1,a company borrowed $50,000 cash by signing a 7% installment note that is to be repaid in 5 annual end-of-year payments of $12,195.The first payment is due on December 31.Prepare the journal entries to record the first and second installment payments.

When the contract rate on a bond issue is less than the market rate,the bonds sell at a discount.

The legal document identifying the rights and obligations of both the bondholders and the issuer is called the ________.

A ________ is a contractual agreement between an employer and its employees for the employer to provide benefits (payments)to employees after they retire.

A company has bonds outstanding with a par value of $100,000.The unamortized premium on these bonds is $2,700.If the company retired these bonds at a call price of 99,the gain or loss on this retirement is:

On January 1,a company issued 10-year,10% bonds payable with a par value of $500,000,and received $442,647 in cash proceeds.The market rate of interest at the date of issuance was 12%.The bonds pay interest semiannually on July 1 and January 1.The issuer uses the straight-line method for amortization.Prepare the issuer's journal entry to record the first semiannual interest payment on July 1.

Strider Corporation issued 14%,5-year bonds with a par value of $5,000,000 on January 1,Year 1.Interest is to be paid semiannually on each June 30 and December 31.The bonds are issued at $5,368,035 cash when the market rate for this bond is 12%. (a)Prepare the general journal entry to record the issuance of the bonds on January 1,year 1. (b)Show how the bonds would be reported on Strider's balance sheet at January 1,Year 1. (c)Assume that Strider uses the effective interest method of amortization of any discount or premium on bonds.Prepare the general journal entry to record the first semiannual interest payment on June 30,Year 1. (d)Assume instead that Strider uses the straight-line method of amortization of any discount or premium on bonds.Prepare the general journal entry to record the first semiannual interest payment on June 30,Year 1.

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 first interest payment using the effective interest method of amortization is:

The carrying value of a long-term note is computed as the present value of all remaining future payments,discounted using the market rate at the time of issuance.

A basic present value concept is that cash paid or received in the future has less value now than the same amount of cash today.

An installment note is an obligation of the issuing company that requires a series of periodic payments to the lender.

A premium on bonds occurs when bonds carry a contract rate greater than the market rate at issuance.

The party that has the right to exercise a call option on callable bonds is:

A company borrows $10,000 and issues a 5-year,6% installment note with interest payable annually.The factor for the present value of an annuity at 6% for 5 years is 4.2124.The factor for the present value of a single sum at 6% for 5 years is 0.7473.The amount of the annual payment is $2,373.94.

A disadvantage of bond financing over equity financing is the burden on the cash flows of the company.