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Exam 9: Long-Term Liabilities

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Question 31

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What is the annual stated interest rate on the bonds? (Hint: Be sure to provide the annual rate rather than the six month rate.)

A) 3%.
B) 3.5%.
C) 6%.
D) 7%.

E) A) and B)
F) A) and C)

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Question 32

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The THA bonds have a life of:

A) 2 years.
B) 3 years.
C) 6 years.
D) Cannot be determined from the given information.

E) A) and B)
F) All of the above

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Question 33

Multiple Choice

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The X2 bonds have a life of:

For the issuer of 20-year bonds, the carrying value using the effective interest method would decrease each year if the bonds were sold at a: $\begin{array}{l}\text { }\\\begin{array} { c c c } &\text { Discount } & \text { Premium } \\\hline a.&\text { No } & \text { No } \\b.&\text { No } & \text { Yes } \\c.&\text { Yes } & \text { Yes } \\d.&\text { Yes } & \text { No }\end{array}\end{array}$

A $500,000 bond issue sold for $490,000. Therefore, the bonds:

The market interest rate does not change over time.

A $500,000 bond issue sold for $510,000. Therefore, the bonds:

Samson Enterprises issued a ten-year, $20 million bond with a 10% interest rate for $19,500,000. The entry to record the bond issuance would have what effect on the financial statements?

The market interest rate represents the true interest rate used by investors to value a company's bond issue.

Which of the following definitions describes a serial bond?

The price of a bond is equal to:

On January 1, 2012, Ripstick Park issues $800,000 of 8% bonds, due in ten years, with interest payable semiannually on June 30 and December 31 each year. Assuming the market interest rate on the issue date is 7%, the bonds will issue at $856,850. 1. Complete the first three rows of an amortization table. 2. Record the bond issue on January 1, 2012, and the first two semi-annual interest payments on June 30, 2012, and December 31, 2012.

Leverage enables a company to earn a higher return using debt than without debt.

How would the carrying value of bonds payable change over time for bonds issued at a $\begin{array} { l c c } & \underline { \text { Discount } } & \underline { \text { Premium } } \\\text { a. } & \text { No effect } & \text { No effect } \\\text { b. } & \text { No effect } & \text { Increase } \\\text { c. } & \text { Increase } & \text { Decrease } \\\text { d. } & \text { Decrease } & \text { Increase }\end{array}$

The times interest earned ratio is calculated as

Monthly installment payments on a note payable include both an amount that represents interest and an amount that represents a reduction of the outstanding loan balance.

What is the stated annual rate of interest on the bonds? (Hint: Be sure to provide the annual rate rather than the six month rate.)

Given the information below, which bond(s) will be issued at a premium? $\begin{array} { | l | c | c | c | c | } \hline & \underline { \text { Bond 1 } } & \underline { \text { Bond 2 } } & \underline { \text { Bond 3 } } & \underline { \text { Bond 4 } } \\\hline \text { Stated Rate of Return } & 7 \% & 12 \% & 10 \% & 8 \% \\\hline \text { Market Rate of Return } & 8 \% & 10 \% & 10 \% & 9 \% \\\hline\end{array}$

When bonds are issued at a premium and the effective interest method is used for amortization, at each interest payment date, the interest expense:

When bonds are issued at a discount (below face amount), the carrying value and the corresponding interest expense increase over time.