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Exam 10: Accounting for Long-Term Liabilities

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Question 31

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A company's ability to issue unsecured debt depends on its credit standing.

A) True
B) False

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Question 32

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A company issued 10-year,9% bonds with a par value of $500,000 when the market rate was 9.5%.The company received $484,087 in cash proceeds.Using the effective interest method,prepare the issuer's journal entry to record the first semiannual interest payment and the amortization of any bond discount or premium.

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Cash payment: $500,000 * 9% *...

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Question 33

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

A bond sells at a discount when the:

The factor for the present value of an annuity for 6 years at 10% is 4.3553.This means that an annuity of six $2,000 payments at 10% is the equivalent of $8,710.60 today.

A lease is a contractual agreement between a lessor and a lessee that grants the lessee the right to use the asset for a period of time in return for cash payment(s)to the lessor.

Secured bonds:

Match each of the appropriate definitions with correct term.

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:

A company purchased equipment and signed a 7-year installment loan at 9% annual interest.The annual payments equal $9,000.The present value for an annuity (series of payments) at 9% for 7 years is 5.0330.The present value of 1 (single sum) for 7 years at 9% is 0.5470.The present value of the loan is:

A bond with a par value of $1,000 trading at 101 ½ sells for a premium.

Which of the following accurately describes a debenture?

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.

Operating leases are long-term or noncancelable leases in which the lessor transfers substantially all the risks and rewards of ownership to the lessee.

Term bonds mature on one specified date,whereas serial bonds mature at more than one date.

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.

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

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

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 a $500,000,10%,8-year bond payable,and received proceeds of $473,845.Interest is payable each June 30 and December 31.The total interest expense on the bond over its eight-year life is $400,000.