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Exam 10: Accounting for Long-Term Liabilities

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Question 91

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A disadvantage of bond financing is:

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

F) All of the above
G) C) and E)

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Question 92

Multiple Choice

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A corporation issued 8% bonds with a par value of $1,000,000,receiving a $20,000 premium.On the interest date 5 years later,after the bond interest was paid and after 40% of the premium had been amortized,the corporation purchased the entire issue on the open market at 99 and retired it.The gain or loss on this retirement is:

A) $0.
B) $10,000 gain.
C) $10,000 loss.
D) $22,000 gain.
E) $22,000 loss.

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

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Question 93

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On January 1,a company issued a $500,000,10%,8-year bond payable,and received proceeds of $473,845.Interest is payable each June 30 and December 31.The company uses the straight-line method to amortize the discount.The amount of interest expense to be recorded on June 30 is $25,000.

A company may retire bonds by all but which of the following means?

Bonds that give the issuer an option of retiring them before they mature are:

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

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.

A company has 10%,20-year bonds outstanding with a par value of $500,000.The company calls the bonds at 96 when the unamortized discount is $24,500.Calculate the gain or loss on the retirement of these bonds.

Describe the journal entries required to record the issuance of bonds at par and the payment of bond interest.

An installment note is an obligation of the issuing company that requires a series of periodic payments to the lender.

The debt-to-equity ratio enables financial statement users to assess the risk of a company's financing structure.

Johanna Corporation issued $3,000,000 of 8%,20-year bonds payable at par value on January 1.Interest is payable each June 30 and December 31. (a)Prepare the general journal entry to record the issuance of the bonds on January 1. (b)Prepare the general journal entry to record the first interest payment on June 30.

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 amount of principal will be included in the first annual payment?

Return on equity increases when the expected rate of return from the acquired assets is higher than the interest rate on the debt issued to finance the acquired assets.

________ bonds reduce a bondholder's risk by requiring the issuer to create a fund of assets set aside as specified amounts and dates to repay the bonds.

One of the similarities of bond and equity financing is that both dividends and equity distribution payments are tax deductible.

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 relationship between the market rate of a bond and the rate of return on the borrowed funds affects the company's return on equity.

The carrying (book)value of a bond at the time it is issued is always equal to its par value.

A company issued 10%,10-year bonds with a par value of $1,000,000 on January 1,at a selling price of $885,295 when the annual market interest rate was 12%.The company uses the effective interest amortization method.Interest is paid semiannually each June 30 and December 31. (1)Prepare an amortization table for the first two payment periods using the format shown below: $\begin{array} { | l | l | l | l | l | l | } \hline \text { Semiannual } & \text { Cash } & \text { Bond } & & & \\\hline \text { Interest } & \text { Interest } & \text { Interest } & \text { Discount } & \text { Unamortized } & \text { Carrying } \\\hline \text { Period } & \text { Paid } & \text { Expense } & \text { Amortization } & \text { Discount } & \text { Value } \\\hline & & & & & \\\hline & & & & & \\\hline & & & & & \\\hline\end{array}$ (2)Prepare the journal entry to record the first semiannual interest payment.