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Exam 14: Long-Term Liabilities: Bonds and Notes

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Question 101

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On January 1, 2014, the Horton Corporation issued 10% bonds with a face value of $200,000. The bonds are sold for $192,000. The bonds pay interest semiannually on June 30 and December 31 and the maturity date is December 31, 2018. Horton records straight-line amortization of the bond discount. The bond interest expense for the year ended December 31, 2014, is

A) $10,800
B) $18,400
C) $21,600
D) $28,000

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

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Question 102

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Debtors are interested in the times-interest-earned ratio because they want to

A) know what rate of interest the corporation is paying
B) have adequate protection against a potential drop in earnings jeopardizing their interest payments
C) be sure their debt is backed by collateral
D) know the tax effect of lending to a corporation

E) B) and C)
F) None of the above

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Question 103

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Sorenson Co., is considering the following alternative plans for financing their company: Income tax is estimated at 40% of income. Determine the earnings per share of common stock under the two alternative financing plans, assuming income before bond interest and income tax is $1,000,000.

On the first day of the fiscal year, Lisbon Co. issued $1,000,000 of 10-year, 7% bonds for $1,050,000, with interest payable semiannually. Orange Inc. purchased the bonds on the issue date for the issue price. If the company uses the straight-line method for amortizing the premium, the journal entry to record the first semiannual interest payment by Lisbon Co. would include a debit to:

The price of a bond is equal to the sum of the interest payments and the face amount of the bonds.

On January 1, 2014, Gemstone Company obtained a $165,000, 10-year, 7% installment note from Guarantee Bank. The note requires annual payments of $23,492, with the first payment occurring on the last day of the fiscal year. The first payment consists of interest of $11,550 and principal repayment of $11,942. The journal entry to record the payment of the first annual amount due on the note would include:

The prices of bonds are quoted as a percentage of the bonds' market value.

If the amount of a bond premium on an issued 11%, 4-year, $100,000 bond is $12,928, the annual interest expense is $5,500.