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

On January 1, 2017, Gee Company issued a 2-year, 8%, $20,000 installment note payable. The payment on this note is $11,215 and is paid annually at year-end beginning December 31, 2017. When the note was issued, the market rate of interest was 8%. Complete the following amortization schedule. Date Cash Interest Expense Principal Carrying Value 1/1/17 12/31/17 12/31/1

How is interest expense calculated according to GAAP?

The following information was extracted from the financial records of Lewis Company. 2017 2016 Balance Sheet Nates payable \ 400,000 \ 400,000 Less: Discount on notes payable 24,000 28,000 Income Statement Interest expense \ 32,800 \ 32,400 Based on this information, the journal entry Lewis Company should prepare to record interest expense during 2017 would include:

Crawford Company conducts a lottery system for Mississippi. The agreement specifies that the lottery must be conducted on a not-for-profit basis. Crawford's monthly sales of lottery tickets amounts to $1,400,000. Monthly operating expenses are $400,000, including a management charge of $30,000. The payment schedule for the guaranteed $1 million dollar payout for a winning lottery ticket is $100,000 immediately and $100,000 each year for the next 9 years. Crawford produced the following income statement as evidence of its not-for-profit status: Ticket sales \ 1,400,000 Expenses: Payout expense \ 1,000,000 Operating expenses Net income A. If the market rate of interest is 4%, determine the present value of the $900,000 liability arising from the monthly winning lottery ticket. B. Recalculate the income statement to reflect GAAP measurement of payout expense.

-On January 1, 2016, Denver Company leased equipment under a 5-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 $18,024. If the lease is considered a capital lease, what is the book value of the lease obligation on January 1, 2017?

When the effective interest method is used to account for notes, the dollar amount of interest will increase or decrease throughout the maturity period. Explain why.

McCourt Investment Advisors purchased newly issued bonds on October 1, 2017, paying $108,983. The bonds had a face value of $100,000, maturing on September 30, 2022, and pay interest semiannually on March 31 and September 30. The stated interest rate is 6%. What is the effective interest rate?

Which one of the following bonds is considered unsecured?

The following information was extracted from the financial records of Lewis Company. 2017 2016 Balance Sheet Notes payable \ 400,000 \ 400,000 Less: Discount on notes payable 24,000 28,000 Income Statement Interest expense \ 32,800 \ 32,400 Based on this information, what is the effective interest rate on the notes payable?

On January 1, 2016 Frank 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% when the bonds were issued at 108. Calculate the total interest expense over the 3-year life of the bond independent of the particular accounting method used to recognize interest expense each year.

Which one of the following will result from receiving cash upon issuing long-term debt?

Various contractual forms specify additional terms such as collateral. Describe collateral as it pertains to a company's debt.

If the maximum debt/equity ratio as specified by a debt covenant is close to being violated, which of the following actions would help avoid a violation of the covenant?

On January 1, 2017, Jackson Corporation issued a 4-year, 12%, $20,000 installment note payable. The payment on this note is $6,585 and is paid annually at year-end beginning December 31, 2017. Complete the following amortization schedule. Date Cash Interest Expense Amortization Carrying Value Jan. 1, 2017 Dec. 31, 2017 Dec. 31, 2018 Dec. 31, 2019 Dec. 31, 2020

On December 31, 2016, Creative Corporation issued a 3-year, 9%, $1,000 bond payable. Beginning in 2017, interest is payable every January 1 over the life of the bond. The market rate of interest on December 31, 2016 is 5%. If Creative uses the effective interest method, show how the bonds will appear on Creative's balance sheet at December 31, 2016.

-On January 1, 2016, Foresite Corporation issued a 10-year, 9%, $100,000 installment note payable. The payment on this note is $15,582 and is paid annually at year-end beginning December 31, 2016. How much total interest is paid over the loan period?

Brown Company is about to issue $300,000 of 8-year bonds paying a 12% interest rate with interest payable semiannually. The effective interest rate for such securities is 10%. Below are available time value of money factors. 8 periods, 16 periods, 8 periods, 16 periods, 10\% 5\% 12\% 6\% Present Value of 1 0.46651 0.45811 0.40388 0.39365 Future Value of 1 2.14359 2.18287 2.47596 2.54035 Present Value of an Annuity of 1 5.33493 10.83777 4.96764 10.10590 Future Value of an Annuity of 1 11.43589 23.65749 12.29969 25.67253 To the closest dollar, how much can Brown expect to receive for the sale of these bonds?

The difference in computing the effective interest rate for non-interest-bearing obligations as compared to installment obligations is

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

On January 1, 2016, Mega Company leased equipment under a 5-year lease with payments of $7,000 on each December 31 of the lease term. The present value of the lease payments at a discount rate of 9% is $27,230. The lease is considered a capital lease. A. Determine the amount of the leased asset and lease obligation on January 1, 2016. B. Why are some leases accounted for as purchases by the lessee?