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

Darren Company issued $8,000 of 8% bonds on January 1, 2010, at a discount of $940. The market rate of interest on the issue date was 10%. The carrying value of the bonds on December 31, 2010 is

On December 31, 2009, Creative Corporation issued a 3-year, 9%, $1,000 bond payable. Beginning in 2010, interest is payable every January 1 over the life of the bond. The market rate of interest on December 31, 2009 is 5%. If Creative uses the effective interest method, show how the bonds will appear on Creative's balance sheet at December 31, 2009.

On January 1, 2009, 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, 2009, balance sheet before the lease agreement. Calculate and compare Grant's debt/equity ratios on January 1, 2009, immediately after the lease is signed, as an operating lease and a capital lease.