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Exam 10: Reporting and Analyzing Long-Term Liabilities

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Question 111

Multiple Choice

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Promissory notes that require the issuer to make a series of payments consisting of both interest and principal are:

A) Debentures.
B) Discounted notes.
C) Installment notes.
D) Indentures.
E) Investment notes.

F) A) and B)
G) B) and D)

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Question 112

Multiple Choice

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A bond is issued at par value when:

A) The bond pays no interest.
B) The issue price is greater than the maturity price.
C) Straight line amortization is used by the company.
D) The market rate of interest is the same as the contract rate of interest.
E) The contract rate and market rate of interest are different.

F) C) and D)
G) None of the above

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Question 113

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

On January 1, a company issued 10%, 10-year bonds payable with a par value of $720,000. The bonds pay interest on July 1 and January 1. The bonds were issued for $817,860 cash, which provided the holders an annual yield of 8%. Prepare the journal entry to record the first semiannual interest payment, assuming it uses the straight-line method of amortization.

___________________ bonds have an option exercisable by the issuer to retire them at a stated dollar amount prior to maturity.

Bonds and long-term notes are similar in that they are typically transacted with multiple lenders.

Clabber Company has bonds outstanding with a par value of $100,000 and a carrying value of $97,300. If the company calls these bonds at a price of $95,000, the gain or loss on retirement is:

A discount on bonds payable:

Sinking fund bonds:

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

On January 1, a company issues bonds dated January 1 with a par value of $300,000. The bonds mature in 5 years. The contract rate is 9%, and interest is paid semiannually on June 30 and December 31. The market rate is 8% and the bonds are sold for $312,177. The journal entry to record the first interest payment using the effective interest method of amortization is:

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 appropriate journal entry to record the issuance of the note?

An advantage of bonds is:

Zhang Company has a loan agreement that provides it with cash today, and the company must pay $25,000 4 years from today. Zhang agrees to a 6% interest rate. The present value factor for 4 periods at 6% is 0.7921. What is the amount of cash that Zhang Company receives today?

The legal document identifying the rights and obligations of both the bondholders and the issuer is called the ____________________________________.

Compounded means that interest during a second period is based on the total amount borrowed plus the interest accrued in the first period.

_______________ bonds have specific assets of the issuing company pledged as collateral.

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 amount of the semi-annual cash payments of interest is:

A corporation issued 8% bonds with a par value of $1,000,000 at $1,020,000. 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 corporation borrowed $125,000 cash by signing a 5-year, 9% installment note requiring equal annual payments each December 31 of $32,136. What journal entry would the issuer record for the first payment?