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Exam 10: Accounting for Long-Term Liabilities

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Question 71

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On January 1,Year 1,Stratton Company borrowed $100,000 on a 10-year,7% installment note payable.The terms of the note require Stratton to pay 10 equal payments of $14,238 each December 31 for 10 years.The required general journal entry to record the payment on the note on December 31,Year 2 is:

A) Debit Interest Expense $7,000; debit Notes Payable $7,238; credit Cash $14,238.
B) Debit Notes Payable $7,000; debit Interest Expense $7,238; credit Cash $14,238.
C) Debit Interest Expense $6,493; debit Notes Payable $7,745; credit Cash $14,238.
D) Debit Notes Payable $14,238; credit Cash $14,238.
E) Debit Notes Payable $10,000; debit Interest Expense $4,238; credit Cash $14,238.

F) None of the above
G) A) and B)

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Question 72

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Collateral from unsecured loans may be sold to offset the loan obligation if the loan is in default.

A) True
B) False

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Question 73

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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.Prepare the issuer's journal entry to record the issuance of the bond.

A company retires its bonds at 105.The face value is $100,000 and the carrying value of the bonds at the retirement date is $103,745.The issuer's journal entry to record the retirement will include a:

Match each of the following terms with the appropriate definitions. -Bonds that require the issuer to create a fund of assets at specified amounts and dates to repay the bonds at maturity.

A bond with a par value of $1,000 trading at 101½ sells for a premium.

The effective interest amortization method:

A company enters into an agreement to make 5 annual year-end payments of $3,000 each,starting one year from now.The annual interest rate is 6%.The present value of an annuity factor for 5 periods at 6% is 4.2124.What is the present value of these five payments?

A company borrowed cash from the bank by signing a 5-year,8% installment note.The present value of an annuity factor at 8% for 5 years is 3.9927.The present value of a single sum at 8% for 5 years is .6806.Each annual payment equals $75,000.The present value of the note is:

How are bond issue prices determined?

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

A company issues 8% bonds with a par value of $40,000 at par on January 1.The market rate on the date of issuance was 7%.The bonds pay interest semiannually on January 1 and July 1.The cash paid on July 1 to the bond holder(s) is:

A company issued 7%,5-year bonds with a par value of $100,000.The market rate when the bonds were issued was 7.5%.The company received $97,946.80 cash for the bonds.Using the effective interest method,the amount of interest expense for the second semiannual interest period is:

Strider Corporation issued 14%,5-year bonds with a par value of $5,000,000 on January 1,Year 1.Interest is to be paid semiannually on each June 30 and December 31.The bonds are issued at $5,368,035 cash when the market rate for this bond is 12%. (a)Prepare the general journal entry to record the issuance of the bonds on January 1,year 1. (b)Show how the bonds would be reported on Strider's balance sheet at January 1,Year 1. (c)Assume that Strider uses the effective interest method of amortization of any discount or premium on bonds.Prepare the general journal entry to record the first semiannual interest payment on June 30,Year 1. (d)Assume instead that Strider uses the straight-line method of amortization of any discount or premium on bonds.Prepare the general journal entry to record the first semiannual interest payment on June 30,Year 1.

On January 1,Parson Freight Company issues 7%,10-year bonds with a par value of $2,000,000.The bonds pay interest semiannually.The market rate of interest is 8% and the bond selling price was $1,864,097.The bond issuance should be recorded as:

Collateral agreements for a note or bond can:

Mortgage contracts grant the lender the right to be paid from the cash proceeds of the sale of a borrower's assets identified in the mortgage if the borrower fails to make the required payments.

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

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:

Explain the amortization of a bond premium.Identify and describe the amortization methods available.