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Exam 10: Accounting for Long-Term Liabilities

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Question 1

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All of the following statements regarding convertible bonds are true except:

A) Holders of convertible bonds can generally decide whether to convert to stock.
B) Holders of convertible bonds have the potential to profit from increases in stock price.
C) Holders of convertible bonds can choose when to convert to stock.
D) Holders of convertible bonds have the option to not convert and continue receiving bond interest payments and par value at maturity.
E) Holders of convertible bonds can choose how many shares of stock to receive at conversion.

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

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Question 2

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Promissory notes that require the issuer to make a series of payments consisting of both interest and principal are:

A) Debentures.
B) Discounted notes.
C) Installment notes.
D) Indentures.
E) Investment notes.

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

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Question 3

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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 $97,946.80 cash for the bonds.Using the effective interest method,the amount of interest expense for the second semiannual interest period is:

Bonds payable to whoever holds them are called ________ bonds.

The legal contract between the issuing corporation and the bondholders is called the bond indenture.

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:

The carrying (book)value of a bond payable is the par value of the bonds plus any discount or minus any premium.

A bond is issued at par value when:

A lessee has substantially all of the benefits and risks of ownership in an operating lease.

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

A company previously issued $2,000,000,10% bonds,receiving a $120,000 premium.On the current year's interest date,after the bond interest was paid and after 40% of the total premium had been amortized,the company calls the bonds at $1,960,000.Prepare the journal entry to record the retirement of these bonds on January 1 of the current year.

The legal document identifying the rights and obligations of both the bondholders and the issuer is called the ________.

A company has bonds outstanding with a par value of $100,000.The unamortized premium on these bonds is $2,700.If the company retired these bonds at a call price of $99,000,the gain or loss on this retirement is:

All of the following are true regarding long-term notes payable except:

The effective interest method assigns a bond interest expense amount that increases over the life of a premium bond.

Debentures always have specific assets of the issuing company pledged as collateral.

The use of debt financing always yields an increase in return on equity.

Describe the journal entries required to record the issuance of bonds at a discount and the payment of bond interest,including any applicable amortization.

The ________ concept is the idea that cash paid (or received)in the future has less value now than the same amount of cash paid (or received)today.

An ________ is an obligation requiring a series of payments to the lender.