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Exam 14: Long-Term Liabilities

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Question 91

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A bond's par value is not necessarily the same as its market value.

A) True
B) False

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Question 92

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On January 1, a company borrowed $50,000 cash by signing a 7% installment note that is to be repaid in 5 annual end-of-year payments of $12,195. The first payment is due on December 31. Prepare the journal entries to record the first and second installment payments.

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Question 93

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Premium on Bonds Payable is an adjunct or accretion liability account.

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 first interest payment using straight-line amortization is:

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:

Tart Company's 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?

Payments on an installment note normally include the accrued interest expense plus a portion of the amount borrowed.

The present value of an annuity can be best or easier computed as the sum of the individual future values for each payment.

A basic present value concept is that cash paid or received in the future is worth less than the same amount of cash today.

A premium on bonds occurs when bonds carry a contract rate greater than the market rate at issuance and the premium reduces the interest expense of the bond over its life.

Owners of coupon bonds are not required to pay tax on the interest earned.

Callable bonds 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.

A company may retire bonds by:

A company with a low level of liabilities in relation to stockholders' equity is likely to have a very high debt-to-equity ratio.

A company issues at par 9% bonds with a par value of $100,000 on April 1. The bonds pay interest semi-annually on January 1 and July 1. The cash received on July 1 by the bond holder(s) is:

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

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 first interest payment using the effective interest method of amortization is:

The carrying value of a long-term note payable:

The debt-to-equity ratio is calculated by dividing total stockholders' equity by total liabilities.

Term bonds are scheduled for maturity on one specified date, whereas serial bonds mature at more than one date.