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Exam 14: Long-Term Liabilities

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Question 101

Multiple Choice

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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:

A) Credit to Discount on Bonds Payable.
B) Credit to Premium on Bonds Payable.
C) Credit to Interest Income.
D) Debit to Discount on Bonds Payable.
E) Debit to Premium on Bonds Payable.

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

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Question 102

Multiple Choice

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A company issued 7%, 5-year bonds with a par value of $100,000. The market rate when the bonds were issued was 7.5%. The company received $97,947 cash for the bonds. Using the effective interest method, the amount of interest expense for the first semiannual interest period is:

A) $3,673.01.
B) $3,705.30.
C) $7,000.00.
D) $7,346.03.
E) $3,500.00.

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

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Question 103

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

The carrying value of bonds at maturity always equals:

Describe the journal entries required to record the issuance of bonds at a premium and the payment of bond interest, including any applicable amortization.

The market value (issue price) of a bond is equal to the present value of all future cash payments provided by the bond.

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

A company's ability to issue unsecured debt depends on its credit standing.

The carrying (book) value of a bond at the time it is issued is always equal to its par value.

Bonds payable to whoever holds them are called ________ bonds.

A pension plan:

Bonds that have an option exercisable by the issuer to retire them at a stated dollar amount prior to maturity are known as:

The ________ concept is the idea that cash paid (or received) in the future has less value now than the same amount of cash paid (or received) today.

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.

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.

A bond with a par value of $1,000 trading at 97½ sells for a premium.

A bond with a par value of $1,000 trading at 101½ sells for a premium.

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. -After accruing interest at year end, the company's December 31, Year 1 balance sheet should reflect total liabilities associated with the bond issue in the amount of:

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 at 6% is 4.2124. What is the present value of these five payments?

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.