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Exam 14: Long-Term Liabilities

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Question 21

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

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A bond premium occurs when bonds are sol...

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Question 22

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A basic present value concept is that cash paid or received in the future has more value now than the same amount of cash received today.

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B) False

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Question 23

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An annuity is a series of equal payments at equal time intervals.

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: Present value of an annuity for 10 periods at 3% 8.5302 Present value of an annuity for 10 periods at 4% 8.1109 Present value of 1 due in 10 periods at 3%................... 0.7441 Present value of 1 due in 10 periods at 4% 0.6756

One of the similarities of bond and equity financing is that both dividends and equity distribution payments are tax deductible.

The contract rate of interest is the rate that borrowers are willing to pay and lenders are willing to accept for a particular bond and its risk level.

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 carrying value of the bonds immediately after the second interest payment is:

On January 1, a company issued 10%, 10-year bonds 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, based on an annual market rate of 8%. Prepare the issuer's journal entry to record the first semiannual interest payment assuming the effective interest method is used.

Indenture refers to a bond's legal contract; debenture refers to an unsecured bond.

A company has bonds outstanding with a par value of $100,000. The unamortized discount on these bonds is $4,500. The company retired these bonds by buying them on the open market at 97. What is the gain or loss on this retirement?

On July 1 of the current year a corporation issued (sold) $1,000,000 of its 12% bonds at par. The bonds pay interest June 30 and December 31. What amount of bond interest expense should the company report on its current year income statement?

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

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

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.

The issue price of bonds is found by computing the future value of the bond's cash payments, discounted at the market rate of interest.

The market value (price) of a bond is equal to:

If an issuer sells bonds at a premium:

On January 1, a company issues bonds dated January 1 with a par value of $300,000. The bonds mature in 5 years. The contract rate is 9%, and interest is paid semiannually on June 30 and December 31. The market rate is 8% and the bonds are sold for $312,177. -The journal entry to record the first interest payment using the effective interest method of amortization is:

Sinking fund bonds:

A pension plan is a contractual agreement between an employer and its employees to provide benefits to employees after they retire.