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Exam 10: Accounting for Long-Term Liabilities

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Question 111

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Clabber Company has bonds outstanding with a par value of $100,000 and a carrying value of $97,300.If the company calls these bonds at a price of $95,000,the gain or loss on retirement is:

A) $5,000 loss.
B) $2,700 gain.
C) $2,700 loss.
D) $2,300 loss.
E) $2,300 gain.

F) A) and C)
G) D) and E)

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Question 112

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Two common ways of retiring bonds before maturity are to (1)exercise a call option or (2)purchase them on the open market.

A) True
B) False

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Question 113

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On January 1,a company issues bonds dated January 1 with a par value of $200,000.The bonds mature in 3 years.The contract rate is 4%,and interest is paid semiannually on June 30 and December 31.The market rate is 5%.Using the present value factors below,the issue (selling) price of the bonds is: $\begin{array} { c c c c } &&{ \text { Present Value of arn } } \\\mathrm { n} = & \mathrm { i } = & \text { Annuity } & \text { Present value of } \$ 1 \\3 & 4.0 \% & 2.7751 & 0.8890 \\6 & 2.0 \% & 5.6014 & 0.8880 \\3 & 5.0 \% & 2.7232 & 0.8638 \\6 & 2.5 \% & 5.5081 & 0.8623\end{array}$

Bonds that mature at more than one date with the result that the principal amount is repaid over a number of periods are known as:

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

Which of the following accurately describes a debenture?

What are methods that a company may use to retire its bonds?

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 corporation borrowed $125,000 cash by signing a 5-year,9% installment note requiring equal annual payments each December 31 of $32,136.What journal entry would the issuer record for the first payment?

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

Callable bonds have an option exercisable by the issuer to retire them at a stated dollar amount prior to maturity.

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:

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

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

All of the following statements regarding accounting treatments for liabilities under U.S.GAAP and IFRS are true except:

A bondholder that owns a $1,000,10%,10-year bond has:

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: $\begin{array}{llr} \text {Present value of an annuity for 10 periods at 3 \% } &8.5302\\ \text { Present value of an annuity for 10 periods at \( 4 \% \) } &8.1109\\ \text { Present value of 1 due in 10 periods at \( 3 \% \) } &0.7441\\ \text { Present value of 1 due in 10 periods at \( 4 \% \) } &0.6756\\\end{array}$

On January 1,a company issued 10-year,10% bonds payable with a par value of $500,000,and received $442,647 in cash proceeds.The market rate of interest at the date of issuance was 12%.The bonds pay interest semiannually on July 1 and January 1.The issuer uses the straight-line method for amortization.Prepare the issuer's journal entry to record the first semiannual interest payment on July 1.

The legal document identifying the rights and obligations of both the bondholders and the issuer is called the ________.