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Exam 10: Accounting for Long-Term Debt

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Question 41

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Sanderling Corporation issued $400,000 of five-year 6% bonds at face value on August 1,2016.Interest is paid annually on July 31. a)Prepare Sanderling's journal entry to record the issuance of the bonds. b)Prepare Sanderling's adjusting entry required on 12/31/16. c)Prepare Sanderling's entry to record the first interest payment on 7/31/17.

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Question 42

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The effective interest rate method of amortizing bond premium or discount results in a constant amount of interest expense every period.

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Question 43

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King Company experienced an accounting event that affected its financial statements as indicated below: Which of the following accounting events could have caused these effects on King's statements?

North Woods Company has a line of credit with the Olympia State Bank.North Woods agreed to pay interest at an annual rate equal to 2% above the bank's prime rate.Funds are borrowed or repaid on the first day of each month and interest is paid in cash on the last day of each month.Borrowing is shown as a positive amount,and repayments are shown as negative amounts indicated by parentheses.Activity to date is given as follows: The amount of interest paid at the end of March would be:

If a bond is sold at 101,its stated rate of interest would be:

Use the following to answer questions The Gordon Corporation issued $70,000 of 6%,5-year bonds on January 1,2016 at 98.The interest payments are due on December 31 each year.Gordon uses the straight-line method of amortization. -On 12/31/20,Gordon Corporation makes the final entry to record interest and amortization.Immediately after that,Wise pays off the bonds as scheduled.Which of the following answers shows the effect of the bond payoff on the financial statements?

Use the following to answer questions On January 1,2016,the Niagara Corporation arranges a $6,000 line of credit with the Centennial Bank.It accepted the bank's offer of 1% above the prime rate with interest payments on December 31 of each year.All borrowings and repayments are to take place on January 1 of each year. -Niagara begins its loan transactions with Centennial Bank by borrowing $2,000 on January 1,2016.Which of the following answers shows the effect of this event on the financial statements?

Use the following to answer questions The Platte Corporation issues a 5-year note payable on January 1,2016 for $5,000.The interest rate is 5% and the annual payment of $1,156,due each December 31,includes both interest and principal. -Which of the following shows the effect of the December 31,2016 payment?

Indicate whether each of the following statements about lines of credit is true or false. _____ a)Line-of-credit agreements generally involve a fluctuating rate of interest. _____ b)A line-of-credit agreement allows a company to borrow on an as-needed basis. _____ c)Interest rates on line-of-credit agreements are often pegged to the consumer price index. _____ d)The signing of a line-of-credit agreement is an asset source transaction. _____ e)The expense recognition for the payment of monthly interest is an asset exchange transaction.

Regardless of the specific type of long-term debt,which of the following is normally required with debt transactions?

Marvin Company issues $125,000 of bonds at face value on January 1.The bonds carry a 6% annual stated rate of interest.Interest is payable in cash on December 31 of each year.Which of the following reflects the financial statement effects of the first interest payment?

If a bond issuer's bond ratings drop,the company probably will have to pay higher interest rates on bonds that have already been issued.

If a company uses the effective interest method of amortizing a bond premium,the carrying value of the bond

Bruce Company experienced an accounting event that was recorded in the company's general journal as indicated below: Which of the following choices accurately reflects how this event would affect Bruce's financial statements?

Franklin Company obtained an $160,000 line of credit from the State Bank on January 1,2016.The company agreed to accept a variable interest rate that was set at 2% above the bank's prime lending rate.The bank's prime rate of interest and the amounts borrowed or repaid during the first three months of 2016 are shown in the following table.Assume that Franklin borrows or repays on the first day of each month.Borrowing is shown as a positive amount and repayments are shown as negative amounts indicated by parentheses. Based on this information alone,the amount of interest expense recognized in March would be closest to:

Which financial statements are affected by the entry to record the payment of bond interest and the related amortization of a discount? Describe how each statement is affected.

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,Torrance Co.issued $100,000 of bonds at the face value.Interest is paid in cash on December 31 of each year.Indicate the effects of the payment of interest on 12/31/2016.

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 January 1,2016,Eagle Co.issued $100,000 of bonds payable at the face value.When the bonds matured on December 31,2021,Eagle used cash to repay the bond principal and the interest for one year,which had not been previously accrued.Indicate the effects of the 12/31/21 payment.

Company A and Company B are identical in all regards except that during 2016 Company A borrowed $40,000 at an interest rate of 10%.In contrast,Company B obtained financing by acquiring $40,000 from sale of common stock.Company B agreed to pay a $4,000 cash dividend each year.Both companies are in a 30% tax bracket.Which company would show the greater retained earnings at the end of 2016,and by what amount?

Thrasher Company reported income before taxes of $180,000.The company is in a 30% income tax bracket.Also,Thrasher's income statement contained a charge for interest expense amounting to $60,000.Based on this information alone,the company's times interest ratio would be: