Exam 11: Long-Term Liabilities: Notes, Bonds, and Leases

On January 1, 2016, Enron Corporation issued a 4-year, 7%, $9,000 bond payable. Beginning in 2017, interest is payable annually every January 1. The market rate of interest at issuance is 9%. How much are the interest payments by Enron? Why is the amount of interest expense different than the cash payments?

Which one of the following is needed in order to find the present value of an obligation?

How does an investor's required rate of return affect investing decisions?

Bowlin Company issued $1,000,000 of 9 percent, ten-year bonds for $937,790 on July 1, 2017, when the market rate of interest was 10 percent. The bonds mature in ten years and pay interest on June 30 and December 31. Bowlin's fiscal year ends on December 31 and the company uses the effective interest method of amortization. The interest expense for the six months ending December 31, 2017 is:

On January 1, 2016, Parker Company leased equipment under a 3-year lease with payments of $5,000 on each December 31 of the lease term. The present value of the lease payments at a discount rate of 12% is $12,010. If the lease is considered a capital lease, depreciation expense (straight-line) and interest expense are recognized. If the lease is considered an operating lease, then rent expense is recognized. What is the difference in the total combined net incomes of 2016, 2017, and 2018, if the lease is considered a capital lease instead of an operating lease?

On January 1, 2016, Precision Corporation issued a 3-year, 7%, $2,000 bond payable. Beginning in 2017, interest is payable every January 1 over the life of the bond. The market rate of interest on January 1, 2016 is 10%. If Precision uses the effective interest method, what is the book value of the bond payable on January 1, 2016?

How does the balance between debt and equity in non-U.S. companies compare to the balance of debt and equity in U.S. companies?

On January 1, 2016, Edison Corporation issued a 4-year, 8%, $5,000 bond payable. Beginning in 2017, interest is payable every January 1 over the life of the bond. The market rate of interest on January 1, 2016 is 10%. A. Calculate the contracted cash interest payments by Edison as specified by this bond. B. Will the total interest expense over the life of the bond be less than or greater than the total cash payments for interest? Explain.

Why might a company redeem bonds before they mature?

RJC Company issued $8,000 of 10% bonds on January 1, 2017. The bonds were issued at a premium. The cash payment for annual interest on the bonds

On January 1, 2016, Field Corporation issued a 3-year, 9%, $5,000 bond payable. Beginning in 2017, interest is payable every January 1 over the life of the bond. The market rate of interest on January 1, 2016 is 6%. What is the impact of the debt/equity ratio as a result of the issuance?

Capital leases are rental agreements for which

On January 1, 2016, Luna Corporation issued a 5-year, 7%, $5,000 bond payable. Beginning in 2017, interest is payable every January 1 over the life of the bond. The market rate of interest on January 1, 2016 is 7%. Luna uses the effective interest method. Calculate the balance sheet value of the bond payable on January 1, 2017.

Determine the coupon rate of interest on the bonds. What does this amount represent?

In a capital lease, GAAP requires the lessee

If an interest-bearing note payable is issued at a discount, then the contractual cash payment for interest is

What is the risk premium of a bond issue and what role does it play in the determination of bond prices?

A coupon payment is

On January 1, 2016, Grant Company leased telephone equipment from Xu, Inc. Grant uses straight-line depreciation. The contract requires Grant to pay $5,000 each December 31 for the next three years, at which time the equipment is to be returned to Xu. Using an interest rate of 8%, the present value of the lease payments is $12,885. The following is Grant's January 1, 2016, balance sheet before the lease agreement. Current assets Equipment Accumulated depreciatian (3,000) Tatal assets \ 42,000 Liadilities Sharehalders' equity Tatal liadilities and sharehalders' equity \ 42,000 Calculate and compare Grant's debt/equity ratios on January 1, 2016, immediately after the lease is signed, as an operating lease and a capital lease.