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

On January 1, 2017, Holly Company leased telephone equipment from ICON, Inc. Straight-line depreciation is used on all equipment with no salvage value. The contract required Holly to pay $5,000 each December 31 for the next three years, at which time the equipment is to be returned to ICON. Using an effective rate of interest of 8%, the present value of the lease payments is $12,885. Numerically derive the difference in Holly's 2017 income if the lease is treated as an operating lease instead of a capital lease.

Financial instruments that are not listed on the balance sheet of a company

Which one of the following is not a financial instrument?

On January 1, 2016, Alcon Corporation issued a 5-year, 10%, $10,000 bond payable. Beginning in 2017, interest is payable every January 1 over the life of the bond. The market rate of interest on the issue date is 10%. Calculate the interest expense for 2017 using the effective interest method.

Which one of the following is one of the capital lease criteria?

On September 10, 2016, Humbert Company issued bonds with a face value of $600,000 for a price of 102. During 2017, Humbert exercised a call provision and redeemed the bonds for 101. At the time of the redemption, the bonds had a book value of $607,000. The journal entry to record the redemption includes:

A five-year, non-interest-bearing, $5,000 note, dated January 1, 2017, has a present value of $3,917. The market rate of interest is 5%. Interest expense for the period ending December 31, 2017, is

Why are some types of leases recorded as purchases?

A provision of a contractual obligation that is designed to protect the interest of lenders is called

If interest expense is less than the contractual interest payment, then

If the maximum debt/equity ratio as specified by a debt covenant is close to being violated, which one of the following actions would increase the likelihood of violating the debt covenant?

On January 1, 2016, Richardson Company leased equipment under a 3-year lease with payments of $8,000 on January 1, 2017, 2018, and 2019. The present value of the lease payments at a discount rate of 7% is $20,992. RIchardson uses straight-line depreciation with no salvage value. The lease is considered a capital lease. Calculate depreciation expense and interest expense for 2016.

Countries throughout the world typically

If a company issues a note payable when the market rate of interest is equal to the stated rate, then

If a company issues a note payable when the market rate of interest is less than the stated rate, then

Which type of note consists of periodic payments covering both interest and principal?

Barkley Brothers Inc. shows the following information on its balance sheet for December 31, 2017. Bonds payable \ 100,000 Less Unamortized discount 5,350 \ 94,650 The bonds have a stated annual interest rate of 5 percent and will mature on December 31, 2019. The market value of the bonds as of December 31, 2017, is $98,167. Assume that Barkley retired the bonds by purchasing them on the open market. The journal entry to record this purchase would include:

A non-interest-bearing note was recorded in the accounting records. The book value of the note

A non-interest-bearing obligation

Duncan Industries sold $100,000 of 12 percent bonds on January 1, 2017, when the market interest rate was 10 percent and received $107,732 for them. The bonds mature on January 1, 2022 and pay interest on June 30 and December 31. Duncan uses the effective interest method of amortization. The total annual cash payment for interest on the bonds is: