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Exam 14: Long-Term Liabilities

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Question 81

Multiple Choice

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Amortizing a bond discount:

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

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

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Question 82

Multiple Choice

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The effective interest amortization method:

A) Allocates bond interest expense over the bond's life using a changing interest rate.
B) Allocates bond interest expense over the bond's life using a constant interest rate.
C) Allocates a decreasing amount of interest over the life of a discounted bond.
D) Allocates bond interest expense using the current market rate for each interest period.
E) Is not allowed by the FASB.

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

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Question 83

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Payments on installment notes normally include accrued interest plus a portion of the principal amount borrowed.

Issuers of coupon bonds are not allowed to deduct the interest expense on their tax returns.

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.

A company received cash proceeds of $206,948 on a bond issue with a par value of $200,000.The difference between par value and issue price for this bond is recorded as a:

A disadvantage of an operating lease is the inability to deduct rental payments in computing taxable income.

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

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 January 1,a company issued 10-year,10% bonds payable with a par value of $500,000,and received $442,647 in cash proceeds.The market rate of interest at the date of issuance was 12%.The bonds pay interest semiannually on July 1 and January 1.The issuer uses the straight-line method for amortization.Prepare the issuer's journal entry to record the first semiannual interest payment on July 1.

A bond traded at 102½ means that:

A company's total liabilities divided by its total stockholders' equity is called the:

A bond sells at a discount when the:

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

Morgan Company issues 9%,20-year bonds with a par value of $750,000 that pay interest semi-annually.The current market rate is 8%.The amount of interest owed to the bondholders for each semiannual interest payment is:

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

_______________ bonds have specific assets of the issuing company pledged as collateral.

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 journal entry to record the first interest payment is:

On January 1,a company borrowed $50,000 cash by signing a 7% installment note that is to be repaid in 5 annual end-of-year payments of $12,195.The first payment is due on December 31.Prepare the journal entries to record the first and second installment payments.

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: