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Exam 10: Reporting and Analyzing Long-Term Liabilities

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Question 1

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The issue price of a bond is equal to:

A) The present value of the bond's cash payments discounted at the bond's market rate.
B) The present value of all future interest payments provided by a bond.
C) The present value of the principal for an interest-bearing bond.
D) The future value of all future cash payments provided by a bond.
E) The future value of all future interest payments provided by a bond.

F) A) and B)
G) A) and C)

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Question 2

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On January 1, $300,000 of par value bonds with a carrying value of $310,000 is converted to 50,000 shares of $5 par value common stock. The entry to record the conversion of the bonds includes all of the following entries except:

A) Debit to Bonds Payable $310,000.
B) Debit to Premium on Bonds Payable $10,000.
C) Credit to Common Stock $250,000.
D) Credit to Paid-In Capital in Excess of Par Value, Common Stock $60,000.
E) Debit to Bonds Payable $300,000.

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

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Question 3

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A pension plan:

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 journal entry to record the issuance of the bond is:

A company issues 6%, 5 year bonds with a par value of $800,000 and semiannual interest payments. On the issue date, the annual market rate of interest is 8%. Compute the issue (selling) price of the bonds. The following information is taken from present value tables:

The carrying (book) value of a bond at the time when it is issued is always equal to its par value.

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

The contract rate on previously issued bonds changes as the market rate of interest changes.

On January 1, Year 1, Stratton Company borrowed $100,000 on a 10-year, 7% installment note payable. The terms of the note require Stratton to pay 10 equal payments of $14,238 each December 31 for 10 years. The required general journal entry to record the first payment on the note on December 31, Year 1 is:

A company borrowed cash from the bank by signing a 5-year, 8% installment note. The present value of an annuity factor at 8% for 5 years is 3.9927. Each annual payment equals $75,000. The present value of the note is:

On January 1, Year 1 a company borrowed $70,000 cash by signing a 9% installment note that is to be repaid with 4 annual year-end payments of $21,607, the first of which is due on December 31, Year 1. (a) Prepare the company's journal entry to record the note's issuance. (b) Prepare the journal entries to record the first and second installment payments.

A particular feature of callable bonds is that they reduce the bondholder's risk by requiring the issuer to create a sinking fund of assets set aside at specified amounts and dates to repay the bonds at maturity.

The market value (issue price) of a bond is equal to the present value of all future cash payments provided by the bond.

An annuity is a series of equal payments at equal time intervals.

The debt-to-equity ratio enables financial statement users to assess the risk of a company's financing structure.

The legal contract between the issuing corporation and the bondholders is called the bond indenture.

When the contract rate on a bond issue is less than the market rate, the bonds will generally sell at a discount.

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 straight-line amortization is:

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, 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 issuance of the bond.