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Exam 10: Reporting and Analyzing Long-Term Liabilities

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Question 1

True/False

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The debt-to-equity ratio enables financial statement users to assess the risk of a company's financing structure.

A) True
B) False

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True

Question 2

Essay

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On April 1,a company issues 6%,10-year,$600,000 par value bonds that pay interest semiannually each March 31 and September 30.The bonds sold at $592,000.The company uses the straight-line method of amortizing bond discounts.Prepare the general journal entry to record the first interest payment on September 30.

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11eae526_661f_80e5_a033_db0120624873_TB7950_00 Cash Payment = $600,000 * 6% * 6/12 = $18,000 Discount on Bonds Payable = ($600,000 − $592,000)/20 = $400 Interest expense = $18,000 + $400 = $18,400

Question 3

Multiple Choice

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A company borrowed cash from the bank by signing a 5-year,8% installment note.The present value of an annuity factor at 8% for 5 years is 3.9927.The present value of a single sum at 8% for 5 years is .6806.Each annual payment equals $75,000.The present value of the note is:

Operating leases are long-term or noncancelable leases in which the lessor transfers substantially all the risks and rewards of ownership to the lessee.

A discount reduces the interest expense of a bond over its life.

A bond with a par value of $1,000 trading at 98 sells for a discount.

The present value of an annuity is equal to the sum of the individual future values for each payment.

A contract pledging title to assets as security for a note or bond is known as a(an) :

The effective interest method assigns a bond interest expense amount that increases over the life of a premium bond.

Sharmer Company issues 5%,5-year bonds with a par value of $1,000,000 and semiannual interest payments.On the issue date,the annual market rate for these bonds is 6%.What is the bond's issue (selling) price,assuming the following factors:

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

The issue price of bonds is found by computing the future value of the bond's cash payments,discounted at the market rate of interest.

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 is the journal entry to record the first annual payment?

The Premium on Bonds Payable account is a(n) :

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.

Bond market values are expressed as a percent of their par (face)value.

The carrying (book)value of a bond payable is the par value of the bonds plus any discount or minus any premium.

A company has 10%,20-year bonds outstanding with a par value of $500,000.The company calls the bonds at 96 when the unamortized discount is $24,500.Calculate the gain or loss on the retirement of these bonds.

Describe the recording procedures for the issuance,retirement,and paying of interest for installment notes.

When the contract rate of a bond is greater than the market rate on the date of issuance,the bond sells at a discount.