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Exam 10: Reporting and Analyzing Long-Term Liabilities

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Question 21

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

A) Debit Interest Expense $12,648.28; debit Premium on Bonds Payable $1,351.72; credit Cash $14,000.00.
B) Debit Interest Payable $14,000.00; credit Cash $14,000.00.
C) Debit Interest Expense $12,648.28; debit Discount on Bonds Payable $1,351.72; credit Cash $14,000.00.
D) Debit Interest Expense $15,351.72; credit Discount on Bonds Payable $1,351.72; credit Cash $14,000.00.
E) Debit Interest Expense $15,405.79; credit Discount on Bonds Payable $1,405.79; credit Cash $14,000.00.

F) B) and D)
G) D) and E)

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Question 22

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

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Installment notes are agreements to repa...

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Question 23

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The market rate for bonds is generally higher when the time period to maturity is longer due to the risk of adverse events occurring over the time period.

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

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

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

Return on equity increases when the expected rate of return from the acquired assets is higher than the interest rate on the debt issued to finance the acquired assets.

A company issued 10%,10-year bonds with a par value of $1,000,000 on January 1,at a selling price of $885,295 when the annual market interest rate was 12%.The company uses the effective interest amortization method.Interest is paid semiannually each June 30 and December 31. (1)Prepare an amortization table for the first two payment periods using the format shown below: (2)Prepare the journal entry to record the first semiannual interest payment.

On January 1,a company issued and sold a $400,000,7%,10-year bond payable,and received proceeds of $396,000.Interest is payable each June 30 and December 31.The company uses the straight-line method to amortize the discount.The journal entry to record the first interest payment is:

A premium reduces the interest expense of a bond over its life.

An ________ is an obligation requiring a series of payments to the lender.

The equal total payments pattern for installment notes consists of changing amounts of interest but constant amounts of principal over the life of the note.

A lessee has substantially all of the benefits and risks of ownership in a finance lease.

________ bonds are bonds that are scheduled for maturity on one specified date.

An advantage of lease financing is the lack of an immediate large cash payment for the leased asset.

On January 1,a company issues 8%,5-year,$300,000 bonds that pay interest semiannually each June 30 and December 31.On the issue date,the annual market rate of interest is 6%.Compute the price of the bonds on their issue date.The following information is taken from present value tables:

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

What is a lease? Explain the difference between an operating lease and a finance lease.

Describe the journal entries required to record the issuance of bonds at par and the payment of bond interest.

Identify the advantages and disadvantages of bond financing.