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Exam 10: Reporting and Analyzing Long-Term Liabilities

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Question 111

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On January 1 of Year 1,Congo Express Airways issued $3,500,000 of 7%,bonds that pay interest semiannually on January 1 and July 1.The bond issue price is $3,197,389 and the market rate of interest for similar bonds is 8%.The bond premium or discount is being amortized using the straight-line method at a rate of $10,087 every six months.The life of these bonds is:

A) 15 years.
B) 30 years.
C) 26.5 years.
D) 32 years
E) 35 years.

F) A) and D)
G) B) and E)

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Question 112

Multiple Choice

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The carrying value of a long-term note payable is computed as:

A) The future value of all remaining payments,using the market rate of interest.
B) The face value of the long-term note less the total of all future interest payments.
C) The present value of all remaining payments,discounted using the market rate of interest at the time of issuance.
D) The present value of all remaining interest payments,discounted using the current market rate of interest.
E) The face value of the long-term note plus the total of all future interest payments.

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

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Question 113

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The relationship between the market rate of a bond and the rate of return on the borrowed funds affects the company's return on equity.

On January 1,Parson Freight Company issues 7%,10-year bonds with a par value of $2,000,000.The bonds pay interest semiannually.The market rate of interest is 8% and the bond selling price was $1,864,097.The bond issuance should be recorded as:

The carrying (book)value of a bond at the time it is issued is always equal to its par value.

Mortgage contracts grant the lender the right to be paid from the cash proceeds of the sale of a borrower's assets identified in the mortgage if the borrower fails to make the required payments.

The ________ ratio is used to assess the risk of a company's financing structure.

The contract rate of interest is the rate that borrowers are willing to pay and lenders are willing to accept for a particular bond and its risk level.

One of the similarities of bond and equity financing is that both dividends and equity distribution payments are tax deductible.

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

A company borrowed $40,000 cash from the bank and signed a 6-year note at 7% annual interest.The present value of an annuity factor for 6 years at 7% is 4.7665.The present value of a single sum factor for 6 years at 7% is 0.6663.The annual payments equal:

Explain the amortization of a bond premium.Identify and describe the amortization methods available.

The rate of interest that borrowers are willing to pay and lenders are willing to accept for a particular bond and its risk level is the ________ of interest.

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

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: (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.

Clabber Company has bonds outstanding with a par value of $100,000 and a carrying value of $97,300.If the company calls these bonds at a price of $95,000,the gain or loss on retirement is:

A company borrows $40,000 and issues a 3-year,10% installment note with interest payable annually.The factor for the present value of an annuity at 10% for 3 years is 2.4869.The factor for the present value of a single sum at 10% for 3 years is 0.7513.The amount of the annual payment is $12,000.

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 issuance of the bond is:

A company holds $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.

Discount on Bonds Payable has a normal debit balance,as it reduces the carrying value of the bonds.