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Exam 10: Accounting for Long-Term Debt

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Question 31

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Straight-line interest amortization of a premium or discount on bonds payable:

A) assigns variable amounts of interest over the term of the liability.
B) uses compound interest principles.
C) assigns the same amount of interest to each interest period over the term of the liability.
D) is required for U.S.income tax reporting.

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

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Question 32

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Indicate whether each of the following statements is true or false. _____ a)EBIT stands for earnings before income taxes. _____ b)EBIT is used in the computation of the return-on-assets ratio. _____ c)A low times-interest-earned ratio is a sign of a high-risk company. _____ d)Dividends are deductible in the determination of taxable income. _____ e)Interest is deducted on the income statement but is ignored on the tax return.

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a)False b)...

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Question 33

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Use the following to answer questions On January 1,2016,The Hanover Corporation issued $70,500 of 8%,5-year bonds at 97.Hanover uses the straight-line method of bond discount amortization.The interest payments are due on December 31 each year. -Based on the above,how much interest expense will Hanover report on its income statement on December 31,2016?

Indicate how each event affects the elements of financial statements.Use the following letters to record your answer in the box shown below each element.Use only one letter for each element.You do not need to enter amounts. -On December 31,2016,Briand Co.paid cash for interest on bonds it had issued on January 1,2016 at 98,and amortized part of the discount on bonds.Briand Co.uses the straight-line method of amortizing bond discounts.Indicate the effects of the amortization of the discount only.

Indicate how each event affects the elements of financial statements.Use the following letters to record your answer in the box shown below each element.Use only one letter for each element.You do not need to enter amounts. -On January 1,2016,Briand Co.issued $200,000 of bonds payable at 98.Indicate the effects of issuing the bonds.

Indicate how each event affects the elements of financial statements.Use the following letters to record your answer in the box shown below each element.Use only one letter for each element.You do not need to enter amounts. -On December 31,2016,Tiller Co.paid cash for interest on bonds it had issued on January 1,2016 at 98,and amortized part of the discount on bonds.Crown Co.uses the effective interest method of amortizing bond discounts.Indicate the effects of the amortization of the discount only.

Indicate how each event affects the elements of financial statements.Use the following letters to record your answer in the box shown below each element.Use only one letter for each element.You do not need to enter amounts. -On December 31,2016,Flagler Corporation had a balance of $20,000 on a line-of-credit with City Bank.Flagler made a payment of $11,200,which included $10,000 on the principal and $1,200 interest.Show the effects of this transaction on Flagler's financial statements.

Use the following to answer questions On January 1,2016,Pierce Corporation issued $25,000 in 8%,5-year bonds payable at 102.Interest payments are due each December 31.Potter uses the straight-line method of amortization. -On January 1,2017,Pierce Corporation called the bonds payable at a price of $25,450.Which of the following answers shows the effect of this transaction on the financial statements?

On January 1,2016 Brown Co.issued $200,000 of 10%,20-year bonds.If Bluefield's tax rate is 40%,the after-tax cost of borrowing related to these bonds for 2016 is:

Companies that issue bonds are required to pay the face value of the bonds at maturity and to make fluctuating periodic interest payments based on the market interest rate.

On January 1,2016,the Hawks Company borrowed $100,000 from the Community Bank,issuing a three-year,8% note payable.Payments of $38,803.35 are to be made each year on December 31.The payment will include both the interest and a portion of the principal.Using the table below,prepare an amortization schedule for the note.

A five-year,$500,000 bond was issued on January 1,2016.The stated rate of interest was 8%,and the effective rate of interest was 10%.The interest is paid semiannually.Which of the following statements is correct?

Park Enterprises issued bonds with a term of 5 years and a face value of $500,000,receiving cash of $508,000.The bonds pay interest once a year,with an annual rate of 7%.Assuming straight-line amortization,the amount of interest expense for the first year would be $31,600.

Indicate how each event affects the elements of financial statements.Use the following letters to record your answer in the box shown below each element.Use only one letter for each element.You do not need to enter amounts. -On December 31,2016,Kirkland Co.paid cash for interest on bonds it had issued on January 1,2016 at 101 ½,and amortized part of the premium on bonds.Indicate the effects of the payment of interest and amortization of the premium.

On January 1,2016,Carlyle Corporation issued a five-year term note.The note requires an annual cash payment on December 31 of each year.The payment includes a principal reduction and interest.Indicate whether each of the following statements is true or false. _____ a)The entry to record issuance of the note will increase assets and liabilities. _____ b)The first payment on the note will reduce liabilities and assets,but will not affect equity. _____ c)The second payment on the note will include higher interest expense than did the first payment. _____ d)Each payment on the note includes a cash flow from operating activities and a cash flow from financing activities. _____ e)The amount of reduction in liabilities will increase with each succeeding payment.

A line of credit typically has an interest rate that is fixed (constant)for the length of the agreement.

Morrison Company issued $200,000 of 10-year,8% bonds at 92 on July 1,2016.Interest is payable semiannually on January 1,and July 1.The company uses straight-line amortization for premium or discount on bonds payable. Required: a)Prepare all necessary journal entries related to the bonds for 2016 and 2017. b)What amount of interest expense will be shown on the 2016 and 2017 income statements? c)What amount of interest payments will be shown on the statement of cash flows for 2016 and 2017?

Use the following to answer questions On January 1,2016,The Hanover Corporation issued $70,500 of 8%,5-year bonds at 97.Hanover uses the straight-line method of bond discount amortization.The interest payments are due on December 31 each year. -The journal entry used to record the interest payment on December 31,2017 would be:

Discuss the tax advantage of long-term debt financing.

If a company uses the effective interest method of amortizing a bond discount,does the interest expense increase,decrease,or stay the same over time? Explain.