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Exam 10: Accounting for Long-Term Liabilities

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Question 61

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

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Question 62

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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.

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Question 63

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A company has assets of $350,000 and total liabilities of $200,000.Its debt-to-equity ratio is 0.6.

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

On January 1,a company issues 6%,10 year $300,000 par value bonds that pay semiannual interest each June 30 and December 31.The bonds sell at par value.Prepare the general journal entry to record the issuance of the bonds on January 1.

The rate of interest that borrowers are willing to pay and lenders are willing to accept for a particular bond and its risk level is the ________ of interest.

A corporation plans to invest $1 million in oil exploration.The corporation is considering two plans to raise the money.Under Plan #1,bonds with a contract rate of interest of 6% would be issued.Under Plan #2,50,000 additional shares of common stock would be issued at $20 per share.The corporation currently has 300,000 shares of stock outstanding,and it expects to earn $700,000 per year before bond interest and income taxes.The net income and return on investment for both plans is shown below: Comment on the relative effects of each alternative,including when one form of financing is preferred to another.

Return on equity increases when the expected rate of return from the acquired assets is ________ than the rate of interest on the bonds used to finance the asset acquisition.

A company purchased two new delivery vans for a total of $250,000 on January 1,Year 1.The company paid $40,000 cash and signed a $210,000,3-year,8% note for the remaining balance.The note is to be paid in three annual end-of-year payments of $81,487 each,with the first payment on December 31,Year 1.Each payment includes interest on the unpaid balance plus principal. (1)Prepare a note amortization table using the format below: $\begin{array} { | l | l | l | l | l | l | } \hline \text { Period } & & \text { Debit } & \text { Debit } & & \\\hline \text { Ending } & \text { Beginning } & \text { Interest } & \text { Notes } & \text { Credit } & \text { Ending } \\\hline \text { Date } & \text { Balance } & \text { Expense } & \text { Payable } & \text { Cash } & \text { Balance } \\\hline 12 / 31 / \text { Yr } 1 & & & & & \\\hline 12 / 31 / \text { Yr } 2 & & & & & \\\hline 12 / 31 / \text { Yr 3 } & & & & & \\\hline\end{array}$ (2)Prepare the journal entries to record the purchase of the vans on January 1,Year 1 and the second annual installment payment on December 31,Year 2.

A bond is issued at par value when:

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

A premium on bonds occurs when bonds carry a contract rate greater than the market rate at issuance.

Wasp Corporation has a loan agreement that provides it with cash today,and the company must pay $25,000 one year from today,$15,000 two years from today,and $5,000 three years from today.Wasp agrees to pay 10% interest.The following are factors from a present value table: $\begin{array} { | l | l | } \hline & \text { Interest rate } \\\hline \text { Periods } & 10 \% \\\hline 1 & 0.9091 \\\hline 2 & 0.8264 \\\hline 3 & 0.7513 \\\hline\end{array}$ What is the amount of cash that Wasp receives today?

Match each of the following terms with the appropriate definitions. -The interest rate that borrowers are willing to pay and lenders are willing to accept for a particular bond at its risk level.

On January 1 of Year 1,Congo Express Airways issued $3,500,000 of 7% bonds that pay interest semiannually on January 1 and July 1.The bond issue price is $3,197,389 and the market rate of interest for similar bonds is 8%.The bond premium or discount is being amortized at a rate of $10,087 every six months. - The amount of interest expense recognized by Congo Express Airways on the bond issue in Year 1 would be:

Saffron Industries most recent balance sheet reports total assets of $42,000,000,total liabilities of $16,000,000 and stockholders' equity of $26,000,000.Management is considering using $3,000,000 of excess cash to prepay $3,000,000 of outstanding bonds.What effect,if any,would prepaying the bonds have on the company's debt-to-equity ratio?

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.

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

On January 1 of Year 1,Congo Express Airways issued $3,500,000 of 7%,bonds that pay interest semiannually on January 1 and July 1.The bond issue price is $3,197,389 and the market rate of interest for similar bonds is 8%. -The bond premium or discount is being amortized using the straight-line method at a rate of $10,087 every six months.The life of these bonds is:

Match each of the following terms with the appropriate definitions. -An obligation requiring a series of periodic payments to the lender.