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Exam 14: Long-Term Liabilities

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Question 81

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Match each of the following terms with the appropriate definitions. (a) Discount on bonds (b) Callable bonds (c) Annuity (d) Debt-to-equity ratio (e) Sinking fund bonds (f) Secured bonds (g) Carrying value (h) Premium on bonds (i) Bond indenture (j) Contract rate

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1. F; 2. C; 3. H; 4....

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Question 82

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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:

A) $10,000 loss.
B) $22,000 gain.
C) $0.
D) $10,000 gain.
E) $22,000 loss.

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

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Question 83

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The debt-to-equity ratio:

An ________ is an obligation requiring a series of payments to the lender.

Periodic interest payments on bonds are determined by multiplying the par value of the bond by the contract rate.

On January 1, a company issues 8%, 5-year, $300,000 bonds that pay interest semiannually. On the issue date, the annual market rate of interest is 6%. The following information is taken from present value tables: Present value of an annuity for 10 periods at $3 \%$$\quad$$\quad$$\quad$ 8.5302 Present value of an annuity for 10 periods at $4 \%$$\quad$$\quad$$\quad$ 8. 1109 Present value of 1 due in 10 periods at $3 \%$$\quad$$\quad$$\quad$$\quad$$\quad$ 0.7441 Present value of 1 due in 10 periods at $4 \%$$\quad$$\quad$$\quad$$\quad$$\quad$ 0.6756 What is the issue (selling) price of the bond?

Match the following definitions with the appropriate term

A company borrows $40,000 and issues a 3-year, 10% installment note with interest payable annually. The factor for the present value of an annuity at 10% for 3 years is 2.4869. The factor for the present value of a single sum at 10% for 3 years is 0.7513. The amount of the annual payment is $12,000.

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

Morgan Company issues 9%, 20-year bonds with a par value of $750,000 that pay interest semiannually. The current market rate is 8%. The amount paid to the bondholders for each semiannual interest payment is:

A bond is issued at par value when:

A company issued 5-year, 7% bonds with a par value of $100,000. The market rate when the bonds were issued was 6.5%. The company received $102,105 cash for the bonds. - Using the straight-line method, the amount of recorded interest expense for the first semiannual interest period is:

On January 1, Parson Freight Company issues 7%, 10-year bonds with a par value of $2,000,000. The bonds pay interest semiannually. The market rate of interest is 8% and the bond selling price was $1,864,097. The bond issuance should be recorded as:

A company issued 10%, 5-year bonds with a par value of $2,000,000, on January 1. Interest is to be paid semiannually each June 30 and December 31. The bonds were sold at $2,162,290 based on an annual market rate of 8%. The company uses the effective interest method of amortization. (1) Prepare an amortization table for the first two semiannual payment periods using the format shown below. $\begin{array} { l | l | l | l | l | l } \text { Semiannual } & \text { Cash } & \text { Bond } & & & \\\hline \text { Interest } & \text { Interest } & \text { Interest } & \text { Premium } & \text { Unamortized } & \text { Carrying } \\\hline \text { Period } & \text { Paid } & \text { Expense } & \text { Amortization } & \text { Premium } & \text { Value } \\\hline & & & & & \\\hline\end{array}$ (2) Prepare the journal entry to record the first semiannual interest payment.

How are bond issue prices determined?

A company previously issued $2,000,000, 10% bonds, receiving a $120,000 premium. On the current year's interest date, after the bond interest was paid and after 40% of the total premium had been amortized, the company purchased the entire bond issue on the open market at 98 and retired it. Prepare the journal entry to record the retirement of these bonds on January 1 of the current year.

Describe installment notes and the nature of the typical payment pattern.

Johanna Corporation issued $3,000,000 of 8%, 20-year bonds payable at par value on January 1. Interest is payable each June 30 and December 31. (a) Prepare the general journal entry to record the issuance of the bonds on January 1. (b) Prepare the general journal entry to record the first interest payment on June 30.

Bond interest paid by a corporation is an expense, whereas dividends paid are not an expense of the corporation.

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.