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Exam 14: Long-Term Liabilities

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Question 71

Multiple Choice

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On January 1, a company issued and sold a $400,000, 7%, 10-year bond payable, and received proceeds of $396,000. Interest is payable each June 30 and December 31. The company uses the straight-line method to amortize the discount. The carrying value of the bonds immediately after the first interest payment is:

A) $400,000.
B) $396,200.
C) $399,800.
D) $400,200.
E) $395,800.

F) C) and D)
G) B) and E)

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Question 72

Multiple Choice

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A bond is issued at par value when:

A) Straight line amortization is used by the company.
B) The bond pays no interest.
C) The bond is callable.
D) The bond is not between interest payment dates.
E) The market rate of interest is the same as the contract rate of interest.

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

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Question 73

True/False

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A company has assets of $350,000 and total liabilities of $200,000. Its debt-to-equity ratio is 0.6.

A disadvantage of bond financing over equity financing is the burden on the cash flows of the company.

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

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 annuity payments equal:

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.

Term bonds are scheduled for maturity on one specified date, whereas serial bonds mature at more than one date.

A basic present value concept is that cash paid or received in the future has more value now than the same amount of cash received today.

Bonds that have interest coupons attached to their certificates, which the bondholders present to a bank or broker for collection, are called:

Bonds and long-term notes are similar in that they are typically transacted with multiple lenders.

An annuity is a series of equal payments at equal time intervals.

Two common ways of retiring bonds before maturity are to (1)exercise a call option or (2)purchase them on the open market.

A basic present value concept is that cash paid or received in the future has less value now than the same amount of cash today.

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.

A premium on bonds occurs when bonds carry a contract rate greater than the market rate at issuance.

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

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 amount of interest expense recognized by Congo Express Airways on the bond issue in Year 1 would be:

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

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: