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Exam 10: Accounting for Long-Term Liabilities

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Question 31

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A company's ability to issue unsecured debt depends on its credit standing.

A) True
B) False

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Question 32

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______________ bonds are bonds that are scheduled for maturity on one specified date.

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Question 33

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

The debt-to-equity ratio is calculated by dividing total stockholders' equity by total liabilities.

A company issued 10-year, 9% bonds with a par value of $500,000 when the market rate was 9.5%. The company received $484,087 in cash proceeds. Prepare the issuer's journal entry to record the issuance of the bond.

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

Adonis Corporation issued 10-year, 8% bonds with a par value of $200,000. Interest is paid semiannually. The market rate on the issue date was 7.5%. Adonis received $206,948 in cash proceeds. Which of the following statements is true?

A corporation plans to invest $1 million in oil exploration. The corporation is considering two plans to raise the money. Under Plan #1, bonds with a contract rate of interest of 6% would be issued. Under Plan #2, 50,000 additional shares of common stock would be issued at $20 per share. The corporation currently has 300,000 shares of stock outstanding, and it expects to earn $700,000 per year before bond interest and income taxes. The net income and return on investment for both plans is shown below: $\begin{array}{|l|r|r|} \hline& \text { Plan } \# 1 & \text { Plan } \# 2 \\\hline \text { Earnings before bond interest and taxes } & \$ 00,000 & \$ 700,000 \\\hline \text { Bond interest expense } & (60,000) & \\\hline \text { Income before taxes } & \$ 640,000 & \$ 700,000 \\\hline \text { Income taxes } & (224,000) & (245,000) \\\hline \text { Net income } & \$ 416,000 & \$ 455,000 \\\hline \text { Equity } & \$ 8000,000 & \$ 9,000,000 \\\hline \text { Return on Equity } & 5.2 \% & 5.06 \% \\\hline\end{array}$ Comment on the relative effects of each alternative, including when one form of financing is preferred to another.

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 straight-line amortization is:

A disadvantage of bond financing over equity financing is the burden on the cash flows of the company.

The present value of an annuity can be best or quickly computed as the sum of the individual future values for each payment.

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

Secured bonds:

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:

What are methods that a company may use to retire its bonds?

A company issued 10-year, 7% bonds with a par value of $100,000. The company received $96,526 for the bonds. Using the straight-line method, the amount of interest expense for the first semiannual interest period is:

____________________ leases are long-term or noncancelable leases by which the lessor transfers substantially all risks and rewards of ownership to the lessee.

A discount on bonds payable occurs when a company issues bonds with an issue price less than par value.

A bond is an issuer's written promise to pay an amount identified as the par value of the bond along with interest.

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