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Exam 10: Reporting and Analyzing Long-Term Liabilities

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Question 101

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The effective interest amortization method:

A) Allocates bond interest expense over the bond's life using a changing interest rate.
B) Allocates bond interest expense over the bond's life using a constant interest rate.
C) Allocates a decreasing amount of interest over the life of a discounted bond.
D) Allocates bond interest expense using the current market rate for each interest period.
E) Is not allowed by the FASB.

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

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Question 102

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A company issued 10-year,7% bonds with a par value of $100,000.The company received $96,526 for the bonds.Using the straight-line method,the amount of interest expense for the first semiannual interest period is:

A) $3,326.00.
B) $3,500.00.
C) $3,673.70.
D) $7,000.00.
E) $7,347.40.

F) A) and C)
G) B) and D)

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Question 103

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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.

The factor for the present value of an annuity at 8% for 10 years is 6.7101.This implies that an annuity of ten $15,000 payments at 8% yields a present value of $2,235.

Saffron Industries most recent balance sheet reports total assets of $42,000,000,total liabilities of $16,000,000 and stockholders' equity of $26,000,000.Management is considering using $3,000,000 of excess cash to prepay $3,000,000 of outstanding bonds.What effect,if any,would prepaying the bonds have on the company's debt-to-equity ratio?

On January 1,a company issues 8%,5-year,$300,000 bonds that pay interest semiannually each June 30 and December 31.On the issue date,the annual 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:

A pension plan is a contractual agreement between an employer and its employees to provide benefits to employees after they retire.

A company must repay the bank a single payment of $20,000 cash in 3 years for a loan it entered into.The loan is at 8% interest compounded annually.The present value factor for 3 years at 8% is 0.7938.The present value of an annuity factor for 3 years at 8% is 2.5771.The present value of the loan (rounded) is:

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.

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 issuance of the bond is:

Which of the following accurately describes a debenture?

On January 1,Year 1,Stratton Company borrowed $100,000 on a 10-year,7% installment note payable.The terms of the note require Stratton to pay 10 equal payments of $14,238 each December 31 for 10 years.The required general journal entry to record the first payment on the note on December 31,Year 1 is:

A bond is an issuer's written promise to pay an amount identified as the par value of the bond along with periodic interest payments.

When applying equal total payments to a note,with each payment the amount applied to the note principal ________ while the interest expense for the note ________.

Bonds that mature at more than one date with the result that the principal amount is repaid over a number of periods are known as:

A company issued 10%,5-year bonds with a par value of $2,000,000,on January 1.Interest is to be paid semiannually each June 30 and December 31.The bonds were sold at $2,162,290 based on an annual market rate of 8%.The company uses the effective interest method of amortization. (1)Prepare an amortization table for the first two semiannual payment periods using the format shown below. (2)Prepare the journal entry to record the first semiannual interest payment.

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

Bond interest paid by a corporation is an expense,whereas dividends paid are not an expense of the corporation.

A company issued 7%,5-year bonds with a par value of $100,000.The market rate when the bonds were issued was 7.5%.The company received $97,947 cash for the bonds.Using the effective interest method,the amount of interest expense for the first semiannual interest period is:

A bond traded at 102½ means that: