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Exam 10: Long-Term Liabilities

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Question 1

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A bond's par value is not necessarily the same as its market value.

A) True
B) False

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Question 2

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Martin Corporation issued $3,000,000 of 8%, 20-year bonds payable at par value on January 1, 2010. Interest is payable each June 30 and December 31. (a) Prepare the general journal entry to record the issuance of the bonds on January 1, 2010. (b) Prepare the general journal entry to record the first interest payment on June 30, 2010.

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$3,000,000...

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Question 3

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A company issued 10%, 5-year bonds with a par value of $400,000. The market rate when the bonds were issued was 8%. The company received $432,458 cash for the bonds. Using the effective interest method, the amount of interest expense for the first semiannual interest period is:

On January 1, a company issues bonds with a par value of $300,000. The bonds mature in 5 years and pay 8% annual interest, payable each June 30 and December 31. On the issue date, the 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: $\begin{array}{|l|r|}\hline \text { Present value of an annuity for } 10 \text { periods at } 4 \% & 8.1109 \\\hline \text { Present value of an annuity for } 10 \text { periods at } 5 \% & 7.7217 \\\hline \text { Present value of } 1 \text { for } 10 \text { periods at } 4 \% & 0.6756 \\\hline \text { Present value of } 1 \text { for } 10 \text { periods at } 5 \% & 0.6139 \\\hline\end{array}$

How are bond issue prices determined?

The ____________ concept is the idea that cash paid (or received) in the future has less value now than the same amount of cash paid (or received) today.

Bonds that give the issuer an option of retiring them prior to the date of maturity are:

If the borrower fails to pay a mortgage, most mortgage contracts grant the lender the right to foreclose on the property that is identified as security in the contract.

The contract between the bond issuer and the bondholders, which identifies the rights and obligations of the parties is called a(n) :

On January 1, 2010, Jacob issues $600,000 of 11%, 15-year bonds at a price of 102½. Six years later, on January 1, 2016, Jacob retires 30% of these bonds by buying them on the open market at 98½. All interest is accounted for and paid through December 31, 2015, the day before the purchase. The straight-line method is used to amortize any bond discount. What is the journal entry to record the retirement of 30% of the bonds on January 1, 2016?

Explain the present value concept and how it applies to long-term liabilities.

Most mortgage contracts grant the lender the right to _______________ on the property if the borrower fails to pay in accordance with the terms of the debt agreement.

If a bond's interest period does not coincide with the issuing company's accounting period, an adjusting entry is necessary to recognize bond interest expense accruing since the most recent interest payment.

A company calls $150,000 par value of bonds with a carrying value of $147,950. The company calls the bonds at $151,000. Prepare the journal entry to record the retirement of the bonds.

A company purchased two new trucks for a total of $250,000 on January 1, 2009. The company paid $40,000 cash and gave a $210,000, 3-year, 8% note for the remaining balance. The note is to be paid in three annual end-of-year payments beginning December 31, 2009. Assume the annual installment payments are to consist of equal amounts of principal plus accrued interest. Prepare a note amortization table using the format below. $\begin{array} { | l | c | c | c | c | c | } \hline \begin{array} { c } \text { Period } \\\text { Ending Date }\end{array} & \begin{array} { c } \text { Beginning } \\\text { Balance }\end{array} & \begin{array} { c } \text { Debit Interest } \\\text { Expense }\end{array} & \begin{array} { c } \text { Debit Notes } \\\text { Payable }\end{array} & \text { Credit Cash } & \begin{array} { c } \text { Ending } \\\text { Balance }\end{array} \\\hline 12 / 31 / 09 & & & & & \\\hline 12 / 31 / 10 & & & & & \\\hline 12 / 31 / 11 & & & & & \\\hline\end{array}$ 12/31/09: Interest Expense: $210,000 x 8% = $16,800 12/31/10: Interest Expense: $140,000 x 8% = $11,200 12/31/11: Interest Expense: $70,000 x 8% = $5,600

The carrying value of a long-term note is computed as the present value of all remaining future payments, discounted using the market rate at the time of issuance.

On October 1, a $30,000, 6%, 3-year installment note payable is issued by a company. The note requires that $10,000 of principal plus accrued interest be paid at the end of each year on September 30. The issuer's journal entry to record the second annual interest payment would include:

What is a bond? Identify and discuss the different types of bonds.

On January 1, 2010, Jacob issues $600,000 of 11%, 15-year bonds at a price of 102½. Six years later, on January 1, 2016, Jacob retires 30% of these bonds by buying them on the open market at 98½. All interest is accounted for and paid through December 31, 2015, the day before the purchase. The straight-line method is used to amortize any bond discount or premium. What is the journal entry to record the issuance of the bonds on January 1, 2010?

On August 1, 2010, a company issues bonds with a par value of $600,000. The bonds mature in 10 years and pay 6% annual interest, payable each February 1 and August 1. The bonds sold at $592,000. The company uses the straight-line method of amortizing bond discounts. The company's year-end is December 31. Prepare the general journal entry to record the interest accrued at December 31, 2010.