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Exam 14: Long-Term Liabilities

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Question 91

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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.The issuer uses the effective interest method for amortization.On the first semiannual interest date,what amount of discount should issuer amortize?

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Question 92

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Secured bonds:

A) Are called debentures.
B) Have specific assets of the issuing company pledged as collateral.
C) Are backed by the issuer's bank.
D) Are subordinated to those of other unsecured liabilities.
E) Are the same as sinking fund bonds.

F) A) and E)
G) C) and D)

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Question 93

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A corporation issued 8% bonds with a par value of $1,000,000,receiving a $20,000 premium.On the interest date 5 years later,after the bond interest was paid and after 40% of the premium had been amortized,the corporation purchased the entire issue on the open market at 99 and retired it.The gain or loss on this retirement is:

The debt-to-equity ratio:

A company may retire bonds by:

What is a lease? Explain the difference between an operating lease and a capital lease.

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

On January 1,a company issues bonds with a par value of $300,000.The bonds mature in 5 years and pay 8% annual interest each June 30 and December 31.On the issue date,the market rate of interest is 6%.Compute the price of the bonds on their issue date.The following information is taken from present value tables:

A company received cash proceeds of $206,948 on a bond issue with a par value of $200,000.The difference between par value and issue price for this bond is recorded as a:

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:

Describe installment notes and the way in which installment notes are paid.

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

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.

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 using the straight-line method at a rate of $10,000 every six months.The life of these bonds is:

A company issues at par 9% bonds with a par value of $100,000 on April 1.The bonds pay interest semi-annually on January 1 and July 1.The cash received on July 1 by the bond holder(s) is:

A company enters into an agreement to make 5 annual year-end payments of $3,000 each,starting one year from now.The annual interest rate is 6%.The present value of an annuity factor for 5 periods,6% is 4.2124.What is the present value of these five payments?

On January 1,Leyden Corporation leased a truck,agreeing to pay $15,252 every December 31 for the six-year life of the lease.The present value of the lease payments,at 6% interest,is $75,000.The lease is considered a capital lease. (a)Prepare the general journal entry to record the acquisition of the truck with the capital lease. (b)Prepare the general journal entry to record the first lease payment on December 31. (c)Record straight-line depreciation on the truck on December 31,assuming a 6-year life and no salvage value.

A bond sells at a discount when the:

When a bond sells at a premium:

A corporation plans to invest $1 million in oil exploration.The corporation is considering two plans to raise the money.Under Plan #1,bonds with a contract rate of interest of 6% would be issued.Under Plan #2,additional shares of common stock would be issued at $20 per share.The corporation currently has 300,000 shares of stock outstanding,and it expects to earn $700,000 per year before bond interest and income taxes.The net income and return on investment for both plans is shown below: Comment on the relative effects of each alternative,including when one form of financing is preferred to another.