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Exam 10: Reporting and Analyzing Long-Term Liabilities

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Question 101

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_____________________ bonds can be exchanged for a fixed number of shares of the issuing corporation's common stock.

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Question 102

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Match each of the following terms with the appropriate definitions

Premises

Responses

Carrying value

The interest rate specified in the bond indenture.

Callable bonds

The net amount at which bonds are reported on the balance sheet.

Annuity

Bonds that require the issuer to create a fund of assets at specified amounts and dates to repay the bonds at maturity.

Sinking fund bonds

Bonds that give the issuer an option of retiring them at a stated amount before the date of maturity.

Contract rate

A written promise to pay an amount identified as the par value along with interest at a stated rate.

Debt to equity ratio

The difference between the par value of a bond and its higher issue price or carrying value.

Bond indenture

The contract between the bond issuer and the bondholder(s); it identifies the rights and obligations of the parties.

Secured bonds

A series of equal payments at equal intervals.

Premium on bonds

The ratio of total liabilities to total equity.

Bond

Bonds that have specific assets of the issuer pledged as collateral.

Premises

Carrying value

Callable bonds

Annuity

Sinking fund bonds

Contract rate

Debt to equity ratio

Bond indenture

Secured bonds

Premium on bonds

Bond

Responses

The interest rate specified in the bond indenture.

The net amount at which bonds are reported on the balance sheet.

Bonds that require the issuer to create a fund of assets at specified amounts and dates to repay the bonds at maturity.

Bonds that give the issuer an option of retiring them at a stated amount before the date of maturity.

A written promise to pay an amount identified as the par value along with interest at a stated rate.

The difference between the par value of a bond and its higher issue price or carrying value.

The contract between the bond issuer and the bondholder(s); it identifies the rights and obligations of the parties.

A series of equal payments at equal intervals.

The ratio of total liabilities to total equity.

Bonds that have specific assets of the issuer pledged as collateral.

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Premises

Responses

Carrying value

Callable bonds

Annuity

Sinking fund bonds

Contract rate

Debt to equity ratio

Bond indenture

Secured bonds

Premium on bonds

Bond

Premises

Carrying value

Callable bonds

Annuity

Sinking fund bonds

Contract rate

Debt to equity ratio

Bond indenture

Secured bonds

Premium on bonds

Bond

Responses

Question 103

Multiple Choice

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The contract between the bond issuer and the bondholders,which identifies the rights and obligations of the parties,is called a(n) :

When the bond contract rate of interest is above the market rate of interest for that bond,the bond sells at a _____________.

On January 1,2013,a company issued 10%,10-year bonds payable with a par value of $720,000.The bonds pay interest each July 1 and January 1.The bonds were sold for $817,860 cash,which provides the holders an annual yield of 8%.Prepare the issuer's general journal entry to record the first semiannual interest payment assuming the effective interest method is used.

On August 1,2013,a company issues bonds with a par value of $600,000.The bonds mature in 10 years and pay 6% annual interest,payable each February 1 and August 1.The bonds sold at $632,000.The company uses the straight-line method of amortizing bond premiums and discounts.The company's year-end is December 31.Prepare the general journal entry to record the interest accrued at December 31,2013.

The debt to equity ratio is calculated by dividing total liabilities by total assets.

Premium on Bonds Payable increases a company's liabilities..

A company borrowed $50,000 cash from the bank and signed a six-year note at 7%.The present value factor for an annuity for six years at 7% is 4.7665.The annual annuity payments equal $10,490.The present value of the loan is:

An advantage of bonds is that interest does not have to be paid.

Promissory notes that require the issuer to make a series of payments consisting of both interest and principal are:

A company has bonds outstanding with a par value of $600,000.The unamortized discount on these bonds is $3,000.The company retired these bonds by buying them on the open market at 98.What is the gain or loss on this retirement?

The debt to equity ratio helps assess the risks of a company's financing structure.

Explain how a bond premium is amortized.Identify and describe the amortization methods available.