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Exam 14: Long-Term Liabilities

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Question 71

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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 straight-line method, prepare the issuer's journal entry to record the first semiannual interest payment and the amortization of any bond discount or premium.(Round amounts to the nearest whole dollar)

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Question 72

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A bond sells at a discount when the:

A) Contract rate is equal to the market rate.
B) Bond pays interest only once a year.
C) Contract rate is above the market rate.
D) Contract rate is below the market rate.
E) Bond has a short-term life.

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Question 73

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______________bonds are bonds that mature at more than one date, often in a series, and thus are usually repaid over a number of periods.

_______bonds have specific assets of the issuing company pledged as collateral.

A company purchased two new delivery vans for a total of $250,000 on January 1, Year 1. The company paid $40,000 cash and signed a $210,000, 3-year, 8% note for the remaining balance. The note is to be paid in three annual end-of-year payments of $81,487 each, with the first payment on December 31, Year 1. Each payment includes interest on the unpaid balance plus principal. (1) Prepare a note amortization table using the format below: $\begin{array}{l|l|l|l|l|l}\text { Period } & & \text { Debit } & \text { Debit } & & \\\hline \text { Ending } & \text { Beginning } & \text { Interest } & \text { Notes } & \text { Credit } & \text { Ending } \\\hline \text { Date } & \text { Balance } & \text { Expense } & \text { Payable } & \text { Cash } & \text { Balance } \\\hline 12 / 31 / \mathrm{Yr} 1 & & & & & \\\hline 12 / 31 / \mathrm{Yr} 2 & & & & & \\\hline 12 / 31 / \mathrm{Yr} 3 & & & & &\end{array}$ (2) Prepare the journal entries to record the purchase of the vans on January 1, Year 1 and the second annual installment payment on December 31, Year 2.

When the contract rate is above the market rate, a bond sells at a discount.

The effective interest method assigns a bond interest expense amount that increases over the life of a premium bond.

A discount on bonds payable occurs when a company issues bonds with an issue price less than par value.

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:

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 straight-line amortization is:

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

On January 1, a company issues 8%, 5-year, $300,000 bonds that pay interest semiannually each June 30 and December 31. On the issue date, the annual market rate of interest for the bonds is 10%. Compute the price of the bonds on their issue date. The following information is taken from present value tables: $\begin{array} { l | l } \text { Present value of an annuity for } 10 \text { periods at } & 8.1109 \\4 \% & \\\hline \text { Present value of an annuity for } 10 \text { periods at } \\5 \% & 7.7217 \\\hline \text { Present value of } 1 \text { for } 10 \text { periods at } 4 \% & 0.6756 \\\hline \text { Present value of } 1 \text { for } 10 \text { periods at } 5 \% & 0.6139\end{array}$

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, 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 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:

Premium on Bonds Payable is an adjunct liability account, as it increases the carrying value of the bond.

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.

Debentures always have specific assets of the issuing company pledged as collateral.

On July 1, Shady Creek Resort borrowed $250,000 cash by signing a 10-year, 8% installment note requiring equal payments each June 30 of $37,258. - What is the journal entry to record the first annual payment?

A company borrows $10,000 and issues a 5-year, 6% installment note with interest payable annually. The factor for the present value of an annuity at 6% for 5 years is 4.2124. The factor for the present value of a single sum at 6% for 5 years is 0.7473. The amount of the annual payment is $2,373.94.