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Exam 14: Long-Term Liabilities

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Question 61

True/False

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Callable bonds reduce the bondholder's risk by requiring the issuer to create a sinking fund of assets set aside at specified amounts and dates to repay the bonds at maturity.

A) True
B) False

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Question 62

Multiple Choice

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A corporation borrowed $125,000 cash by signing a 5-year, 9% installment note requiring equal annual payments each December 31 of $32,136. What journal entry would the issuer record for the first payment?

A) Debit Interest Expense $7,136; debit Notes Payable $25,000; credit Cash $32,136.
B) Debit Notes Payable $32,136; debit Interest Payable $11,250; credit Cash $43,386.
C) Debit Interest Expense $11,250; debit Notes Payable $20,886; credit Cash $32,136.
D) Debit Notes Payable $32,136; credit Cash $32,136.
E) Debit Notes Payable $11,250; credit Cash $11,250.

F) A) and D)
G) None of the above

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Question 63

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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 issuer received $484,087 in cash proceeds. Prepare the issuer's journal entry to record the bond issuance.

The Premium on Bonds Payable account is a(n) :

Identify the advantages and disadvantages of bond financing.

The carrying amount (book value) of a bond payable is the par value of the bonds plus the discount.

A company issued 5-year, 7% bonds with a par value of $100,000. The market rate when the bonds were issued was 6.5%. The company received $101,137 cash for the bonds. Using the effective interest method, the amount of recorded interest expense for the first semiannual interest period is:

A bond is a written promise to pay an amount identified as the par value of the bond along with interest.

Describe the journal entries required to record the issuance of bonds and the payment of bond interest.

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 first interest payment using the effective interest method of amortization is:

Sinking fund bonds:

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

Bonds owned by investors whose names and addresses are recorded by the issuing company, and for which interest payments are made with checks or cash transfers to the bondholders, are called:

A 10-year bond issue with a $100,000 par value, 8% annual contract rate, with interest payable semiannually means that the issuer must repay $100,000 at the end of 10 years and make 20 semiannual interest payments of $4,000 each.

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

Hornet Corporation has a loan agreement that provides it with cash today, and the company must pay $25,000 one year from today, $15,000 two years from today, and $5,000 three years from today. Hornet agrees to pay 10% interest. The following are factors from a present value table: What is the amount of cash that Hornet receives today?

On January 1, a company issued a $500,000, 10%, 8-year bond payable, and received proceeds of $487,000. Interest is payable each June 30 and December 31. The total interest expense on the bond over its eight-year life is $400,000.

The effective interest method yields increasing amounts of bond interest expense and decreasing amounts of premium amortization over the bond's life for bonds issued at a premium.

Match each of the following terms with the appropriate definitions.

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