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Exam 10: Accounting for Long-Term Liabilities

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Question 21

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What is a bond? Identify and discuss the different characteristics and features bonds may possess.

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A bond is a written promise to pay an am...

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Question 22

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

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Question 23

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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.

A disadvantage of an operating lease is the inability to deduct rental payments in computing taxable income.

Interest payments on bonds are determined by multiplying the par value of the bond by the stated contract rate.

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

_____________________ bonds can be exchanged for a fixed number of shares of the issuing corporation's common stock.

Callable bonds have an option exercisable by the issuer to retire them at a stated dollar amount prior to maturity.

On January 1, Year 1 Cleaver Company borrowed $85,000 cash by signing a 7% installment note that is to be repaid with 4 annual year-end payments of $25,094, the first of which is due on December 31, Year 1. (a) Prepare the company's journal entry to record the note's issuance. (b) Prepare the journal entries to record the first installment payment.

Strider Corporation issued 14%, 5-year bonds with a par value of $5,000,000 on January 1, Year 1. Interest is to be paid semiannually on each June 30 and December 31. The bonds are issued at $5,368,035 cash when the market rate for this bond is 12%. (a) Prepare the general journal entry to record the issuance of the bonds on January 1, year 1. (b) Show how the bonds would be reported on Strider's balance sheet at January 1, Year 1. (c) Assume that Strider uses the effective interest method of amortization of any discount or premium on bonds. Prepare the general journal entry to record the first semiannual interest payment on June 30, Year 1. (d) Assume instead that Strider uses the straight-line method of amortization of any discount or premium on bonds. Prepare the general journal entry to record the first semiannual interest payment on June 30, Year 1.

On January 1, a company issued 10%, 10-year bonds with a par value of $720,000. The bonds pay interest each July 1 and January 1. The bonds were sold for $817,860 cash, based on an annual market rate of 8%. Prepare the issuer's journal entry to record the first semiannual interest payment assuming the effective interest method is used.

On October 1 of the current year a corporation issued (sold) $1,000,000 of its 12% bonds at par plus accrued interest. The bonds were dated July 1 of this year. What amount of bond interest expense should the company report on its current year income statement?

On January 1, a company borrowed $70,000 cash by signing a 9% installment note that is to be repaid with 4 equal year-end payments of $21,607. The amount borrowed is $70,000 and 4 years of interest at 9% equals $25,200, for a total of $95,200, yet the total payments on the note amount to only $86,428. Explain.

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 $102,105 cash for the bonds. Using the effective interest method, the amount of recorded interest expense for the first semiannual interest period is:

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.

The issue price of bonds is found by computing the future value of the bond's cash payments, discounted at the market rate of interest.

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 at a rate of $10,087 every six months. The company's December 31, Year 1 balance sheet should reflect total liabilities associated with the bond issue in the amount of:

___________________ bonds have an option exercisable by the issuer to retire them at a stated dollar amount prior to maturity.

Explain how to record the issuance and sale of a bond between interest payment dates.

On August 1, a company issues 6%, 10 year, $600,000 par value bonds that pay interest semiannually each February 1 and August 1. The bonds sold at $632,000. The company uses the straight-line method of amortizing bond premiums. The company's year-end is December 31. Prepare the general journal entry to record the interest accrued at December 31.