Question 1

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:

Accepted Answer

A)  Debit Interest Expense $12,648.28; debit Discount on Bonds Payable $1,351.72; credit Cash $14,000.00.
B)  Debit Interest Expense $15,405.79; credit Discount on Bonds Payable $1,405.79; credit Cash $14,000.00.
C)  Debit Interest Payable $14,000.00; credit Cash $14,000.00.
D)  Debit Interest Expense $12,648.28; debit Premium on Bonds Payable $1,351.72; credit Cash $14,000.00.
E)  Debit Interest Expense $15,351.72; credit Discount on Bonds Payable $1,351.72; credit Cash $14,000.00.F) A) and C)
G) C) and D)

Question 2

On July 1, Shady Creek Resort borrowed $250,000 cash by signing a 10-year, 8% installment note requiring equal payments each June 30 of $37,258. What is the journal entry to record the first annual payment?

Accepted Answer

A)  Debit Interest Expense $20,000; debit Interest Payable $17,258; credit Cash $37,258.
B)  Debit Interest Expense $20,000; credit Cash $20,000.
C)  Debit Cash $250,000; debit Interest Expense $37,258; credit Notes Payable $287,258.
D)  Debit Interest Expense $20,000; debit Notes Payable $17,258; credit Cash $37,258.
E)  Debit Interest Expense $37,258; credit Cash $37,258.F) A) and B)
G) A) and C)

Question 3

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

Accepted Answer

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

Question 4

A disadvantage of bond financing is:

Accepted Answer

A)  Bonds do not affect owners' control.
B)  Bonds can increase return on equity.
C)  Interest on bonds is tax deductible.
D)  Bonds pay periodic interest and the repayment of par value at maturity.
E)  It allows firms to trade on the equity.F) A) and B)
G) A) and C)

Question 5

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?

Accepted Answer

A)  Prepaying the debt would cause the firm's debt-to-equity ratio to remain unchanged.
B)  Prepaying the debt would cause the firm's debt-to-equity ratio to improve from .62 to .50.
C)  Prepaying the debt would cause the firm's debt-to-equity ratio to worsen from .62 to .57.
D)  Prepaying the debt would cause the firm's debt-to-equity ratio to worsen from .62 to .50.
E)  Prepaying the debt would cause the firm's debt-to-equity ratio to improve from .62 to .57.F) C) and D)
G) All of the above

Question 6

Collateral agreements for a note or bond can:

Accepted Answer

A)  Increase the risk of loss in comparison with unsecured debt.
B)  Have no effect on risk.
C)  Increase total cost for the borrower.
D)  Reduce the risk of loss in comparison with unsecured debt.
E)  Reduce the issuer's assets.F) B) and D)
G) C) and D)

Question 7

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 the loan (rounded) is:

Accepted Answer

A)  $25,195.
B)  $51,542.
C)  $20,000.
D)  $7,761.
E)  $15,876.F) None of the above
G) A) and D)

Question 8

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.

Accepted Answer

A) True 
 B)False

Question 9

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:

Accepted Answer

A)  Debit Bonds Payable $400,000; debit Bond Interest Expense $16,207; credit Cash $416,207.
B)  Debit Cash $383,793; debit Premium on Bonds Payable $16,207; credit Bonds Payable $400,000.
C)  Debit Cash $383,793; credit Bonds Payable $383,793.
D)  Debit Cash $383,793; debit Discount on Bonds Payable $16,207; credit Bonds Payable $400,000.
E)  Debit Cash $400,000; credit Discount on Bonds Payable $16,207; credit Bonds Payable $416,207.F) A) and B)
G) B) and C)

Question 10

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 straight-line method, the amount of recorded interest expense for the first semiannual interest period is:

Accepted Answer

A)  $6,633.70.
B)  $7,000.00.
C)  $3,500.00.
D)  $3,289.50.
E)  $3,613,70.F) A) and B)
G) C) and D)

Question 11

A bond with a par value of $1,000 trading at 101½ sells for a premium.

Accepted Answer

A) True 
 B)False

Question 12

The market rate for bonds is generally higher when the time period to maturity is longer due to the risk of adverse events occurring over the time period.

Accepted Answer

A) True 
 B)False

Question 13

A company issues 8% bonds with a par value of $40,000 at par on January 1. The market rate on the date of issuance was 7%. The bonds pay interest semiannually on January 1 and July 1. The cash paid on July 1 to the bond holder(s) is:

Accepted Answer

A)  $3,200.
B)  $1,400.
C)  $0.
D)  $1,600.
E)  $2,800.F) D) and E)
G) A) and E)

Question 14

Bond market values are expressed as a percent of their par (face)value.

Accepted Answer

A) True 
 B)False

Question 15

A company with a low level of liabilities in relation to stockholders' equity is likely to have a very high debt-to-equity ratio.

Accepted Answer

A) True 
 B)False

Question 16

A premium reduces the interest expense of a bond over its life.

Accepted Answer

A) True 
 B)False

Question 17

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.

Accepted Answer

A) True 
 B)False

Question 18

The market value (price) of a bond is equal to:

Accepted Answer

A)  The present value of the principal for an interest-bearing bond.
B)  The future value of all future interest payments provided by a bond.
C)  The present value of all future cash payments provided by a bond.
D)  The future value of all future cash payments provided by a bond.
E)  The present value of all future interest payments provided by a bond.F) B) and D)
G) A) and E)

Question 19

If an issuer sells bonds at a premium:

Accepted Answer

A)  The carrying value of the bond stays constant over time.
B)  The carrying value increases from the par value to the issue price over the bond's term.
C)  The carrying value decreases from the par value to the issue price over the bond's term.
D)  The carrying value decreases from the issue price to the par value over the bond's term.
E)  The carrying value increases from the issue price to the par value over the bond's term.F) B) and C)
G) A) and B)

Question 20

Amortizing a bond discount:

Accepted Answer

A)  Decreases the Bonds Payable account.
B)  Increases the market value of the Bonds Payable.
C)  Increases cash flows from the bond.
D)  Allocates a portion of the total discount to interest expense each interest period.
E)  Decreases interest expense each period.F) C) and D)
G) A) and E)

Exam 14: Long-Term Liabilities

On July 1, Shady Creek Resort borrowed $250,000 cash by signing a 10-year, 8% installment note requiring equal payments each June 30 of $37,258. What is the journal entry to record the first annual payment?

Correct Answer
verified

A premium reduces the interest expense of a bond over its life.

Correct Answer
verified

A disadvantage of bond financing is:

Correct Answer
verified

A company with a low level of liabilities in relation to stockholders' equity is likely to have a very high debt-to-equity ratio.

Correct Answer
verified

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

Correct Answer
verified

A company issues 8% bonds with a par value of $40,000 at par on January 1. The market rate on the date of issuance was 7%. The bonds pay interest semiannually on January 1 and July 1. The cash paid on July 1 to the bond holder(s) is:

Correct Answer
verified

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 straight-line method, the amount of recorded interest expense for the first semiannual interest period is:

Correct Answer
verified

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.

Correct Answer
verified

A bond with a par value of $1,000 trading at 101½ sells for a premium.

Correct Answer
verified

The market rate for bonds is generally higher when the time period to maturity is longer due to the risk of adverse events occurring over the time period.

Correct Answer
verified

Amortizing a bond discount:

Correct Answer
verified

Collateral agreements for a note or bond can:

Correct Answer
verified

Bond market values are expressed as a percent of their par (face)value.

Correct Answer
verified

Correct Answer
verified

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 the loan (rounded) is:

Correct Answer
verified

The market value (price) of a bond is equal to:

Correct Answer
verified

Correct Answer
verified

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.

Correct Answer
verified

If an issuer sells bonds at a premium:

Correct Answer
verified

Exam 14: Long-Term Liabilities

On July 1, Shady Creek Resort borrowed $250,000 cash by signing a 10-year, 8% installment note requiring equal payments each June 30 of $37,258. What is the journal entry to record the first annual payment?

Correct AnswerverifiedShow Answer

A premium reduces the interest expense of a bond over its life.

Correct AnswerverifiedShow Answer

A disadvantage of bond financing is:

Correct AnswerverifiedShow Answer

A company with a low level of liabilities in relation to stockholders' equity is likely to have a very high debt-to-equity ratio.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

A company issues 8% bonds with a par value of $40,000 at par on January 1. The market rate on the date of issuance was 7%. The bonds pay interest semiannually on January 1 and July 1. The cash paid on July 1 to the bond holder(s) is:

Correct AnswerverifiedShow Answer

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 straight-line method, the amount of recorded interest expense for the first semiannual interest period is:

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

A bond with a par value of $1,000 trading at 101½ sells for a premium.

Correct AnswerverifiedShow Answer

The market rate for bonds is generally higher when the time period to maturity is longer due to the risk of adverse events occurring over the time period.

Correct AnswerverifiedShow Answer

Amortizing a bond discount:

Correct AnswerverifiedShow Answer

Collateral agreements for a note or bond can:

Correct AnswerverifiedShow Answer

Bond market values are expressed as a percent of their par (face)value.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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 the loan (rounded) is:

Correct AnswerverifiedShow Answer

The market value (price) of a bond is equal to:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

If an issuer sells bonds at a premium:

Correct AnswerverifiedShow Answer

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