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Exam 10: Accounting for Long-Term Liabilities

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Question 81

True/False

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An advantage of bond financing is that issuing bonds does not affect owner control.

A) True
B) False

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Question 82

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Match each of the following terms with the appropriate definitions. -Bonds with interest coupons attached to their certificates; the bondholders detach the coupons when they mature and present them to a bank or broker for collection.

A) Convertible bonds
B) Coupon bonds
C) Bearer bonds
D) Bond indenture
E) Installment note
F) Unsecured bonds
G) Market rate
H) Serial bonds
I) Effective interest rate method
J) Term bonds

K) B) and E)
L) C) and E)

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Question 83

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A bond sells at a discount when the:

A bond with a par value of $1,000 trading at 97½ sells for a premium.

Bonds payable to whoever holds them are called ________ bonds.

A company purchased equipment and signed a 7-year installment loan at 9% annual interest.The annual payments equal $9,000.The present value of an annuity factor for 7 years at 9% is 5.0330.The present value of a single sum factor for 7 years at 9% is 0.5470.The present value of the loan is:

The factor for the present value of an annuity for 6 years at 10% is 4.3553.This implies that an annuity of six $2,000 payments at 10% is the equivalent of $8,710.60 today.

Periodic interest payments on bonds are determined by multiplying the par value of the bond by the contract rate.

Sinking fund bonds:

A particular feature of callable bonds is that they 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 contract pledging title to assets as security for a note or bond is known as a(an) :

Seedly Corporation's most recent balance sheet reports total assets of $35,000,000 and total liabilities of $17,500,000.Management is considering issuing $5,000,000 of par value bonds (at par) with a maturity date of ten years and a contract rate of 7%.What effect,if any,would issuing the bonds have on the company's debt-to-equity ratio?

Interest on bonds is tax deductible.

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

Zhang Company has a loan agreement that provides it with cash today,and the company must pay $25,000 4 years from today.Zhang agrees to a 6% interest rate.The present value factor for 4 periods at 6% is 0.7921.What is the amount of cash that Zhang Company receives today?

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:

The carrying value of bonds at maturity always equals:

When the contract rate of a bond is greater than the market rate on the date of issuance,the bond sells at a discount.

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. $\begin{array} { | l | l | l | l | l | l | } \hline \text { Semiannual } & \text { Cash } & \text { Bond } & & & \\\hline \text { Interest } & \text { Interest } & \text { Interest } & \text { Premium } & \text { Unamortized } & \text { Carrying } \\\hline \text { Period } & \text { Paid } & \text { Expense } & \text { Amortization } & \text { Premium } & \text { Value } \\\hline & & & & & \\\hline & & & & & \\\hline & & & & & \\\hline\end{array}$ (2)Prepare the journal entry to record the first semiannual interest payment.

A discount on bonds payable: